When starting a company, one of the first decisions to make is what type of entity your business will be – usually either an S corporation or a C corporation.
A C corporation is recognized as a separate taxpaying entity whose profits are taxed to the corporation when earned, and are taxed again to the shareholders when distributed as dividends. The corporation does not get a tax deduction when it distributes dividends to shareholders, and shareholders cannot deduct losses of the corporation.
An S corporation is different in that it can pass corporate income, losses, deductions and credits through to its shareholders. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are taxed at individual rates. The primary advantage of an S corporation is that it is not double taxed on corporate income.
While there are certain requirements for S corp status, there are also some tax benefits that come with it. The C corp status can be elected by any business, but to become an S corp, your business must:
- Be a domestic corporation
- Have only allowable shareholders (may not be partnerships, corporations or non-resident alien shareholders)
- Have no more than 100 shareholders
- Have only one class of stock
Also, to establish or change a business’ status to an S corp, Form 2553 must be signed by all shareholders and filed with the IRS.
The differences seem straightforward on the surface, but to ensure that your company has the most advantageous status, it helps to discuss this with a knowledgeable advisor.
Further resources for understanding C corps and S corps:
