We know– deciding between being an S corp vs. C corp for a business entity is the last thing you have time for.
Unfortunately, before your business can turn a profit (or file its taxes…) you need to choose a business entity.
The only problem? It’s not easy sorting through all the corporation jargon in your quest to make a smart, informed choice.
So, what is the difference between an S corp and C corp? And which is best for your business?
Below, we’ll answer those questions and much more.
S Corp vs. C Corp: Similarities
First, let’s talk about how an S corp and C corp are the same.
The reality is, they’re both corporations, so they have very few real differences.
Both an S corp and C corp:
- Are separate corporate entities: This pretty much means that a corporation, as opposed to a partnership or sole proprietorship, is treated like its own separate person not connected to any owner or shareholder.
- Have limited liability protection: This is one of the defining characteristics of a corporation and it essentially means that shareholders are not personally responsible for debts or other liabilities connected with the business.
- Follow the same rules corporation rules: Both types of corporations must hold to the same bylaws, stock rules, shareholder meetings, annual tax filing requirements, and fees.
- And have the same basic structure: Both types of corporations have shareholders, directors, and officers instead of owners. Ownership is dispersed into pieces among all shareholders as opposed to having one or a handful of owners (in the case of a partnership).
As you can see, both S corps and C corps have quite a bit in common. In fact, they have more similarities than they do differences.
However, the differences are there and it’s important to know what those differences are so you can pick the business structure that is best for your business.
S Corp vs. C Corp: Differences
So, S corps and C corps have a lot in common. But how do they differ?
The S corp vs. C corp comparison brings to light a few important distinctions when it comes to taxes, ownership, and shareholder restrictions:
S Corp vs. C Corp: Advantages and disadvantages
Now that you know the basic differences, let’s break down why you might choose an S corp vs. C corp by looking at both the advantages and disadvantages of both.
Why choose a C corp?
There are several reasons why you might prefer (or not prefer) to choose a C corp structure for your business.
Advantages and disadvantages include:
C corp: Advantages
The benefits of a C corp lie mostly in their flexible stock and shareholder options:
- Several tax benefits: C corps can potentially deduct the cost of employee benefits such as health, disability, and dental insurance.
- No shareholder limit means more potential shareholders: C corps can not only have as many shareholders as they want, they can also have shareholders from all around the world, a huge advantage for any business that taps into the global marketplace.
- And a more attractive deal means more money from shareholders: C corps can also acquire more money from shareholders due in part from both the multiple stock classes as well as the fact that investors aren’t liable for anything, meaning they’re more comfortable investing their money.
C corp: Disadvantages
While there are several attractive advantages, there are a few tax-related disadvantages of being a C corporation as well:
- Pay double taxes: C corporations pay income tax both at the corporate level as well as on the personal level in the form of dividends.
- Can’t write off losses: C corp owners can’t write off a loss on their personal income taxes due to the C corp tax structure.
- Pay taxes quarterly: While this doesn’t mean you pay taxes more often, it does mean that taxes are a more intensive process for a C corp, almost guaranteeing the need for a dedicated tax professional on your side.
Where C corps really shine is with a larger company that needs access to more potential shareholders and fewer restrictions for those shareholders, however, you’ll pay more in taxes so there is a trade-off.
Why choose an S corp?
Just like a C corp, an S corp offers several unique advantages and disadvantages that make it the perfect fit for certain business owners.
S corp: Advantages
In contrast to the C corporation’s shareholder benefits, an S corp’s primary benefits come primarily from its unique tax structure:
- You don’t pay taxes on the corporate level: Whereas with the C corp you pay taxes twice, once at the corporate level and again on the personal level, with an S corp that income “passes through” the corporation so that you only pay taxes on the personal level.
- You can write off losses: As opposed to a C corp, with an S corp you can write off business losses on your personal income statements.
- File taxes once a year: Once again in contrast to a C corp, you only have to file taxes once a year. This is great news particularly for new business owners looking to save every minute of time they can.
S corp: Disadvantages
Like the C corp, S corporation disadvantages are few but apparent:
- Shareholder limitations: As opposed to a C corp which has no limitations and allows international shareholders, an S corp has both a limitation of 100 shareholders and doesn’t allow shareholders outside the U.S.
- Stricter tax filing standards: Due in part to the tax benefits afforded to an S corp, the IRS has stricter standards when it comes to filing taxes. Don’t follow those standards?
While there are obvious disadvantages, the benefits of an S corp for young corporations and fresh business owners looking to keep costs down are quite enticing.
S corp vs. C corp: Which should you choose?
Both a C corporation and S corporation offer unique advantages.
If you’re a new business owner trying to keep costs down and looking to take a loss for the next year or two, an S corp might be the perfect fit.
On the other hand, if you’re an established business looking to incorporate a C corporation’s shareholder benefits might be more advantageous.
Ultimately, it just comes down your business’ needs and what stage your business is in– and you know that better than anyone else.
How to create an S corp / C corp
Opening both a C corp and S corp is easier than ever before.
You can do it the old-fashioned way, which we’ll include instructions for below, but you can also use an online service like LegalZoom to simplify the entire process for a small fee.
LegalZoom specifies three simple steps to getting your business entity up and running:
- Select the structure that fits your business and fill out a short questionnaire
- LegalZoom assembles your documents and files them directly with your state
- You receive your completed paperwork by mail (no work required from this point on)
In contrast, if you prefer to do the entire process yourself, the steps are as follows:
*Keep in mind that the process for starting an S corp is the same as a C corp with the exception of one extra step at the end, which you’ll see notated. Other than that, the process is the same for both.
- File your DBA (“Doing Business As”) or business name with your secretary of state
- File your articles of incorporation
- Draft corporate bylaws
- Issue stock certificates to all stockholders once receiving word back from your secretary of state
- Apply for your business license and any other relevant business permits and IDs based on your industry. Check with your state and city for location-specific requirements.
- File IRS Form-SS-4 to obtain your EIN (Employer Identification Number). This is required for several important functions from hiring employees to applying for a small business loan and business bank account.
- *For filing an S corp ONLY: File IRS Form 2553, which elects your corporation to become an S corp. Make sure that this is signed by all shareholders and submitted within 75 days of your corporation formation.
*Steps 1-6 are all that’s required for creating a C corp.
*Step 7 is only required if you’re creating an S corp.
Keep in mind that depending on what state you’re located in, you may also be required to file a state-level S corporation election form– similar to Form 2553– after you’ve incorporated your business.
Ultimately, the choice is up to you. Just keep in mind that if you do it yourself you’ll have to keep track of the paperwork and that can become very time consuming (not to mention confusing).
S Corp vs. C Corp: The choice is yours
Deciding between an S corp vs. C corp business structure isn’t exciting or sexy, but it’s a necessary part of the road to profit and business success.
It’s not easy sorting through all the confusing forms and state, federal, and IRS requirements, but we hope we made both the process and requirements crystal clear to ease the process.
So, which do you choose: is an S corp or C corp a better fit for your business?
As a matter of best practice, you should always consult with your accountant or whoever will be filing your taxes before ultimately making this business decision
