You may have heard the terms “C-Corp” and “S Corporation” tossed around when it comes to business registration. These are the two most common types of corporations in the United States.
When it comes to choosing a business structure, there is a lot on the plate to consider. Unfortunately, we can not help you decide whether you start a barbershop or a coffee shop, nor can we tell you that you should invest in a landscape business or a superstore will be a more profitable business.
Defining S Corp and C Corp
C Corporation Definition
C corp is a default type of corporation with no ownership restriction and has freedom of equity financing. However, a significant drawback with C corp is that it is subjected to double taxation. For this reason, business owners prefer S corp or LLC which offer tax flexibility.
S Corporation Definition
S corp elects itself as a pass-through tax entity to avoid double taxation. But, to be compliant with S corp status, it faces multiple restrictions related to ownership, stock, and transfer of shares. These restrictions make it difficult for S corp to raise capital.
Why You Should Choose S Corp!
If you want to save money, time, and headaches, you should know the advantages and disadvantages of S corp before taking any final decision. Here is why you should choose the S subchapter of a corporation, and you should not.
Why You Should Choose C Corp!
Like S corp, C corp is not 100% perfect. It also has some pluses and some minuses. At the end of the day, your personalized needs and future goals will guide the final decision.
However, here are some advantages and disadvantages of C corp that will clear your thought about adopting C corp as a legal business structure;
S Corp vs. C Corp | The Similarities
Since both are corporation types, they share some similarities stated as follows;
Limited liability protection
If your business is registered as a corporation, it will have limited liability protection. It means the corporation owners called shareholders would not be not personally responsible for business debts and liabilities.
Articles of Incorporation
Regardless of whether you choose S corporation or C corporation as your business entity,
You have to file formation documents with the state. These filing documents, called the Articles of Incorporation or Certificate of Incorporation, are the same for both.
S corps and C corps both have similar management structures: shareholders, directors, and officers, and the corporation owns the business. The owners of the corporation are called shareholders, and they elect the board of directors who directs decision-making and corporation affairs. For day-to-day operations and business affairs, the board selects the officers.
C corporations and S corporations have no distinction between compliance responsibilities. Both follow the internal and external corporate formalities and obligations, including adopting bylaws, holding shareholder and director meetings, issuing stock, filing annual reports, maintaining a registered agent and registered office, and paying annual fees.
S Corp Vs C Corp | How Are They Different?
Being subchapters of the corporation, S corp and C corp are similar in many ways, some essential aspects make them distinguished entities. The following are those aspects;
Number of Shareholders
S corps can not have more than 100 shareholders. Moreover, all the S corp shareholders must be US citizens/residents.
C corporations do not have restrictions on the number of shareholders. It can have as many members as it wants. In addition, C corp shareholders could be residents of any country.
With some exceptions, an S corporation’s shareholders must be individuals. LLCs, S or C corporations, trusts, or partnerships can not own an S corp.
C corps can be owned by individuals or other business entities such as other corporations, LLCs, trusts, and partnerships.
S corps are pass-through taxation entities; hence the tax is paid on shareholders’ individual tax returns. S corps file an informational IRS form the “1120S”; however, it does not pay corporate-level income tax.
In this business structure, the C corps and its shareholders are separate taxable entities. The corporate-level tax is paid by filing a corporate tax return form “1120,” and shareholders who get the corporate income as dividends also pay tax on their individual tax returns. Hence C corp is taxed twice.
Classes of Stock
S corp can only have class A stocks and can not provide its investors the preference for distributors and other privileges.
It can have several stock classes and its investors can give priority to distributors. Hence there is more room for growth for investors.
Having multiple stock classes sets a hierarchy among the shareholders. However, since an S corp can have only one type of stock class, there is no hierarchy, and all shareholders are at the same level in an S corp.
Since C corp can have multiple classes of stock, there is a hierarchy among C corp shareholders.
Ease of Getting Equity Financing
Due to having complex compliance requirements, especially citizenship restrictions, owners should be individuals; it is harder for S corps to seek equity financing.
As C corp is not bound by complex compliance restrictions, there is more room for growth for investors and finding equity financing is much easier with C corp.
Should You Opt for an S Corp or a C Corp? Final Overview
After reading this article, we hope you have a clear idea of S corp and C corp and how they are different. Now it is time to compare this information with your customized needs and your future plans.
In short, if you prefer fewer restrictions and plan to raise money through investors, go for a C corporation. However, be mindful that as a C corp you will also have to pay double tax. Hence, if tax is a big issue, be a pass-through entity by opting for S corp.
Aisha Noreen is an owner of a small business with more than 9 years of experience in the marketing industry. With the wisdom of an old soul, she always seeks innovation and mind-blowing ROI techniques. Her unique approach helped many small businesses thrive and she can surprise you in many ways as well. Believe it or not, her energy, passion, and creativity are contagious enough to transform your business and take it to another level.