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 corporation in the United States.
A sole proprietor or individual who wants to start their own business has a choice between these two forms which would be tax-advantaged differently depending on how they’re structured legally at home country level but there aren’t many other factors involved with deciding one over another when you first get started as someone starting out; it mostly boils down what kind of legal structure will work best for your needs going forward long term!
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. You can also see our complete guideline on how LLC members are taxed.
On the other hand, 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 ownerships, stock, and transfer of shares, making it difficult for S corp to raise capital.
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 more profitable.
However, Moneyaisle is committed to helping you choose the best legal structure for your business.
Whether you want to pick a Limited Liability Company (LLC), or a corporation, whether you are inclined towards partnership, or you decide to remain a default business entity, the sole proprietorship, Moneyaisle’s detailed guides on each of these structures help you paint a clear picture. This article will discuss S corp vs. C corp; the similarities, differences, advantages, and disadvantages.
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 | How Are They Different?
Being subchapters of the corporation, S corp and C corp are similar in many ways, such as limited liability protection, management structure, article of incorporation, and corporate formalities. However, some essential aspects make them distinguished entities. Following are those aspects;
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 a Marketing strategist and content planner with more than 9 years of experience in the 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.