When it comes to setting up a business, there are a lot of things to consider. Most notable among these is how the company is set up. Most people know about the likes of LLCs and more but aren’t familiar with the likes of a C Corp and an S Corp. However, both of these can be thought of as somewhat of a sub-category for your business; as such, your business can be both an LLC and either a C Corp or an S Corp.
It’s worth mentioning, however, that the majority of businesses are traditionally set up as a C Corp unless the ‘S’ category is specifically asked for. Having said that, there are a variety of differences when you compare a C Corp vs S Corp and both can have a variety of benefits for your business.
C Corp vs S Corp: Formation
All businesses are initially set up as a C Corporation, so there’s not going to be much of a difference when it comes to setting up the business in its early stages. However, once your business has been set up, you then need to apply for categorization as an S Corp. This is done by filing an Election by a Small Business Corporation form. Also known as the IRS Form 2553. This is filed with the Internal Revenue Service and is filed regularly. This filing needs to be done every year and needs to be filed no later than March 15. The IRS will then decide on whether or not to give you an S Corp categorization. This then lets you take advantage of the benefits that your business may gain from being an S Corp.
C Corp vs S Corp: Taxation
The biggest difference between an S Corp and a C Corp is how much taxes will need to be paid. With an S Corp, these taxes are significantly lower which is why many business owners want to file as an S Corp. This is mostly when it comes to federal taxes. When a business makes any profits, these are taxed and are then reported on the corporation tax return.
If any after-tax profits are given to shareholders and dividends, they’re taxed again through their personal tax returns. Many people have referred to this as “double taxing.” However, this is perfectly avoidable by registering as an S Corp. This is most evident with the likes of a sole proprietorship or a partnership; companies that are more regularly seen with very few shareholders. With an S Corp, businesses can pass over the corporate taxes and pay a personal tax on any profits that go to their share of the business.
Essentially, profits are seen more as a personal income for business owners. This may also be seen with state taxes, although it’s worth taking a look at your state laws as some states also engage in the practice of double taxing S Corps.
C Corp vs S Corp: Ownership
In general, C Corps are easier to sell shares in which is why the majority of them are typically registered as the likes of LLCs. S Corps are also more likely to be registered as sole owners or partnerships because being an S Corp makes it a lot harder to sell shares in. This has to do with a few limits that the IRS has placed on an S Corp. Most notable among these are:
- Aren’t allowed to issue more than one type of stock;
- Cannot have more than 100 shareholders;
- Cannot have shareholders who are not U.S Residents/Citizens; and
- Can’t be owned by any other form of business or trust.
Because of that, trying to sell all or part of an S Corp can be a lot more difficult than it is with a C Corp. This is because none of those restrictions apply to a C Corp.
With all of that in mind, it’s worth considering which corporation is right for you, as both have unique benefits and drawbacks. An S Corp may be better suited for the likes of small businesses, but those who are looking to become national or international may be better as a C Corp. This is because of the degree of flexibility and restrictions that both have in place, some of which may be better suited to certain types of business.