S corporations and C corporations’ business structures derive their names from the sections of the Internal Revenue Code under which they pay taxes. S corporations pay taxes under Subchapter S while C corporations pay taxes under Subchapter C.
Common qualities of both S corporations and C corporations
- Structure: C corps and S corps have directors, officers, and shareholders. Shareholders are the corporation owners, but the corporation owns the entity. The shareholders choose the board of directors who oversees and directs the affairs and decision-making of the corporation. The board of management selects the officers to run the daily business affairs.
- Limited liability protection: Both corporations offer limited liability protection. Thus, shareholders are not personally responsible for the entity’s liabilities and debts.
- Filing documents: You must file creation documents with the state. The documents, called the Certificate of Incorporation or articles of incorporation, are similar irrespective of whether you opt to pay taxes as a C corporation or an S corporation.
- Corporate formalities: State corporate laws require both corporations to observe the internal and external corporate obligations and formalities. Such formalities include issuing stock holding directors and shareholders meetings, adopting bylaws, paying annual fees, filing annual reports, and keeping a registered office and a registered agent.
The differnces between C Corporations and S Corporations
- Taxation: C corporations are distinctly taxable units. They file corporate tax returns and pay taxes at the company level. C corporations also face the likelihood of double taxation if their proceeds are distributed to shareholders as dividends. In his case, corporate income tax is first paid at the corporate level and yet again on individual dividends. On the other side, S corporations are pass-through taxation entities. These entities file an informational federal return. Nevertheless, you do not pay income tax at the corporate level. The losses or profits of the entity pass through to the business owners and are stated on the individual’s tax returns.
- Corporate ownership: State corporation laws do not distinguish between C corporations and S corporations. Nevertheless, the Internal Revenue Code places several restrictions on shareholding for a corporation to be an S corporation. The law restricts S corporations to not more than 100 shareholders, who must be US citizens or residents. C corporations do not have any restrictions on ownership.
- Stock: C corporations can have many classes of stock, while S corps can only have one class.
The benefits of each C Corporations and S Corporations
Advantages of S Corporation
- No payment of corporate Tax.
- The Jobs and Tax Cuts Act of 2017 gives eligible S corporation owners up to 20% deduction of the net qualified business income.
- An S corporation’s losses pass through to the shareholders, who can use the losses to offset income.
Advantages C Corporation
- No limit on the number of shareholders
- No ownership restrictions
- No classes of stock restrictions
- Lesser maximum tax rate
- More capital raising options