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Tax Blog

The Difference Between C Corporations and S Corporations

When deciding between forming a C corporation (C-Corp) and an S corporation (S-Corp), business owners must understand the fundamental differences in formation, taxation, and ownership restrictions.

Formation

A C-Corp is the default type of corporation. When you file your articles of incorporation with your state’s secretary of state, your business is automatically registered as a C-corp. To form an S-Corp, you must take another step by filing IRS Form 2553 to elect S-corporation status for federal tax purposes. Thus, while both require filing articles of incorporation, the S-Corp necessitates an extra step for its special tax classification.

Taxation

One of the most significant differences between C-corps and S-corps lies in how they are taxed. C-corps face “double taxation”: they pay taxes on their profits at the corporate level and then shareholders pay taxes on dividends received on their tax returns. In contrast, S-corps are pass-through entities, meaning profits and losses are reported directly on the shareholders' tax returns, avoiding double taxation. This allows S-Corp owners to pay taxes at their income tax rates.

Ownership Restrictions

Ownership rules vary considerably between the two types of corporations. C-corps have no restrictions on the number of shareholders. They can have multiple classes of stock, making them an attractive option for businesses planning to sell shares or bring in a variety of investors, including foreign ones. On the other hand, S-corps are limited to 100 shareholders, all of whom must be U.S. citizens or residents. S-corps are also restricted to one class of stock, which can complicate raising capital from investors.

Similarities

Despite these differences, C-corps and S-corps share several characteristics. Both provide limited liability protection, ensuring the business is legally separate from its owners. Each requires filing articles of incorporation, appointing a registered agent, and creating bylaws. Additionally, both types of corporations have a board of directors elected by shareholders.

When deciding between a C-Corp and an S-Corp, consider these factors, the similarities, and differences, carefully to determine which structure aligns best with your business goals and needs. For more information, please contact The Center for Financial, Legal, & Tax Planning, Inc. professionals at (618) 997-3436.

 



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The Center for Financial, Legal & Tax Planning, Inc.

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Phone: 618-997-3436 618-997-0479| Fax: 618-997-8370

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