What is the difference between a C corporation and S corporation?

15 Jun What is the difference between a C corporation and S corporation?

What are the differences and similarities between the two types of corporations and how can you choose the one that is right for your business?

A “corporation” is a legal entity that you can form to own your business interest. So for example, if John wants to open up a dog grooming business, he may create a corporation to run the business.

There are two types corporations that John may be interested in forming, an “S Corporation” or “C Corporation.”
Selecting the right type of corporation requires detailed legal guidance as well as insight by your accountant. There are several key similarities and differences between the two types of corporations, here are some of the main similarities and differences:

SIMILARITIES:

  • Liability Protection: Shareholders in both types of corporate entities are generally not responsible for the business debts or liabilities.
  • Formalities: Both entities are required to keep up with various corporate formalities in order to be compliant.
  • Corporate Structure: Both entities have a corporate structure that includes Shareholders, Directors, and Officers.

 

DIFFERENCES:

  • Taxes: C Corporations pay taxes at the corporate level, and then the individual shareholder will pay taxes on his or her dividends  (or profits) from the corporation. Whereas an S Corporation is not subject to double taxation, and the taxes pass through the entities to the individual shareholders.
  • Classes of Stock: C corporations can issue different classes of stock allowing owners to have different rights. For example, John can issue ‘voting stock’ to himself, but ‘nonvoting stock’ to an investor who is joining him on the venture. Compare with an S corporation which is only allowed to have one class of stock.
  • Ownership: C Corporations can have an unlimited number of shareholders whereas S Corporations are limited in the number of shareholders they can have. Furthermore, S corporation shareholders must be certain types of individuals.
  • Investors: C corporations are attractive to venture capital whereas S corporations, because of their limitations in the types and number of shareholders, are not.

So, although C Corporations have more flexibility for shareholder rights and ownership, they face tax implications for this privilege. Regardless of the corporation type, be sure to include your interest in your estate plan. This topic will be discussed further in next month’s post. Consult with our office to learn which corporate entity will be a right fit for your business. Contact (818) 649-9110