Distinctions between S Corporations and C Corporations:
Your C Corporation is the default corporation under the Internal Revenue Service (IRS) rules while your S Corporation is the kind of corporation which has elected a special tax status with the IRS. Therefore, enjoy some tax privileges. However, both structures get their names from the parts of the Internal Revenue Code where they are taxed under. Your C Corporation is taxed under Subchapter C while S corporations are taxed under Subchapter S. Form 2553 must be accomplished and filed with the IRS to elect S Corporation status and all S Corporation guidelines must be met by the applicant.
Both C and S Corporations have the following qualities:
Whether you choose an S or a C Corporation, the decision normally comes down to how you want the corporation to be treated for federal income tax purposes. Our dedicated Business Specialists will be able to assist you in choosing the appropriate business structure for you.
S Corporations are pass-through taxation entities. They file Form 1120S – informational federal return, but no tax is paid at the corporate level. Instead, whatever profits or losses of the business is passed-through to the business and reported on the personal tax returns of the respective owners. Whatever amount is due is therefore paid at the individual’s level.
C Corporations on the other hand are separate taxable entities. They file Form 1120 – corporate tax return, and they pay taxes on the corporate level. There is also a possibility of double taxation if the income of the corporation has been distributed in the form of dividends, which in turn becomes taxable income. Corporate income tax will first be paid in the corporate level and thereafter on the individual level on the dividends received.
State corporation laws do not distinguish between S Corporations and C Corporations. However, there are several restrictions in place by the Internal Revenue Code as to who can be shareholders in order for a corporation to qualify as an S Corporation. S Corporations cannot have more than 100 shareholders who must either be United States citizens or residents, C Corporations have no restrictions as to ownership. An S Corporation cannot be owned by C Corporations and S Corporations are subject to exceptions, LLCs, many trusts, and partnerships. An S Corporation can have only one class of stock while C Corporations can have multiple classes. While this may seem to be confusing to you, our dedicated Business Specialists will be able to guide you through and assist you in determining which business structure is appropriate for your circumstances.