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

What are the differences and similarities between a C corporation and an S corporation? 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.

John may be interested in forming two types of corporations, “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: To be compliant, both entities must keep up with various corporate formalities.
  • Corporate Structure: Both entities have a corporate structure that includes Shareholders, Directors, and Officers.

Differences

  • Taxes: C Corporations pay taxes at the corporate level. 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. An S corporation can only one class of stock.
  • Ownership: C Corporations can have an unlimited number of shareholders. Whereas, S Corporations can have a limited number of shareholders. 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. In next month’s post, we will further discuss this topic. Consult with our office to learn which corporate entity will be a right fit for your business. Contact (818) 649-9110

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