Charlotte, NC: C-Corporation vs. S-Corporation

A person is faced with many decisions when they decide to start their own business. One of the first and most important decisions that must be made is what type of business structure to go with. There are many variables that go into deciding which structure would be more beneficial. Today we are going to look at the difference between a C-Corporation versus an S-Corporation.

The C-Corp is considered the standard corporation, while the S-Corp has elected special tax status by the IRS. However, the special status under the S-Corp is not automatic. One must elect to become an S-Corp, and must do so by filing Form 2554 with the IRS.

One of the major differences between these two structures is the way that they are taxed. A C-Corp is considered a separate entity, therefore requiring that they file a separate corporate tax return as well as pay taxes at the corporate level. In addition, a C-Corp also faces double taxation as the corporation is taxed on its income, and then the shareholders are taxed on any dividends they receive. S-Corps however are considered “pass through entities’.” This means that the profit and losses pass through the business and instead are reported on the individual’s personal tax return. Therefore taxes are paid at the individual level by the owners, and no income is taxed at the corporate level.

Another difference between these two entities is ownership. While a C-Corp has no restrictions as to ownership, an S-Corp is limited to 100 shareholders, and shareholders must be U.S. citizens. Another restriction placed on an S-Corp is that they may only have one class of stock, unlike the C-Corp which may have multiple classes.

Determining what business structure is best for your business is an important decision, and it is imperative to have an attorney who is knowledgeable in this area of law and up to date with all of the IRS tax codes. If you are interested in forming a corporation, or just have further questions, please do not hesitate to contact us.