Did you know that there are more than thirty million small businesses in the United States? When just starting out, one of the first decisions an executive will have to make is to choose what the company’s corporate status will be.
Often, people end up choosing between being a S-Corp and a C-Corp. But when it comes to S-Corp vs C-Corp, what are the actual differences?
This is an important question and we’ve got the right answers here. So keep on reading and we’ll take you through the main differences between a S Corporation and a C Corporation.
Formation
A C Corporation is often seen as the default kind of corporation. When you incorporate your company in your state, you will be designated as a C Corp. If you want to be an S Corporation instead then you will have to file a form.
An S Corp has a limited number of shareholders. This usually means that the shareholders are more involved with daily operations.
It’s easier to form a C Corp. You’ll have to file less paperwork and it is usually the default status of a business.
Taxation
A C Corporation gets taxed twice. The company pays a corporate income tax. The shareholders then need to pay federal taxes on their income through dividends.
An S Corp, on the other hand, has pass-through taxation. This means that shareholders report their losses and income on their personal tax forms.
Because of this, they only need to pay personal taxes and don’t pay corporate taxes.
This is usually the main reason why a company might choose to become an S Corporation. Many S Corporations can deduct up to twenty percent of their business income on their personal tax forms. If you are part of an S Corp then you will be able to write off your company’s losses on your personal tax return.
Ownership
Another major difference between these two kinds of corporations has to do with ownership. A C Corp doesn’t have restrictions when it comes to who can take ownership.
Any person can be an owner and there is no limit to how many owners there are.
With an S Corp, you can’t have more than one hundred owners and they all need to be American citizens.
Also, an S Corp can only have one class of stock. A C Corp can issue many classes of stock. If you plan to grow quickly then being an S Corp can be detrimental to your growth.
It’s important to note that if you want to be a corporation or LLC, this is going to be different than a C-Corp or S-Corp. So you should talk to your accountant and see which kind of status will be best for your situation.
The Importance of Knowing S-Corp vs. C-Corp
When you’re starting a business, you’ll be confronted with a bunch of different terms that can affect your tax and ownership status. By knowing the differences between S-Corp vs C-Corp, you can better prepare your company for success.
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