C Corp vs. S Corp

Attribute	C Corp	S Corp
Taxation	Double taxation - corporate profits taxed at corporate level and dividends taxed at individual level	Pass-through taxation - profits and losses pass through to shareholders' personal tax returns
Ownership	No restrictions on ownership, can have unlimited number of shareholders	Restrictions on ownership, limited to 100 shareholders who must be US citizens or residents
Management	Managed by a board of directors and officers	Managed by shareholders and directors
Formation	More complex and expensive to form	Less complex and less expensive to form
Stock Classes	Can have multiple classes of stock	Only one class of stock allowed

Overview

When starting a business, one of the key decisions to make is choosing the right legal structure. Two common options for businesses in the United States are C Corporations (C Corps) and S Corporations (S Corps). Both offer unique advantages and disadvantages that can impact the way a business operates and its tax obligations.

Taxation

One of the main differences between C Corps and S Corps is how they are taxed. C Corps are subject to double taxation, meaning the corporation itself is taxed on its profits, and then shareholders are taxed on any dividends they receive. This can result in a higher overall tax burden for C Corps. On the other hand, S Corps are pass-through entities, meaning profits and losses are passed through to the shareholders, who report them on their individual tax returns. This can result in a lower tax burden for S Corps.

Ownership

Another key difference between C Corps and S Corps is ownership restrictions. C Corps can have an unlimited number of shareholders, and those shareholders can be individuals, other corporations, or foreign entities. S Corps, on the other hand, are subject to more restrictions. S Corps can only have up to 100 shareholders, and those shareholders must be U.S. citizens or residents. Additionally, S Corps cannot be owned by other corporations or partnerships.

Management

When it comes to management structure, C Corps and S Corps are similar in that they both have a board of directors who oversee the company's operations. However, the way in which these boards are structured can differ. C Corps typically have a more formal management structure, with a clear hierarchy of officers and directors. S Corps, on the other hand, may have a more flexible management structure, with fewer formal requirements for officers and directors.

Stock Options

Stock options can be an important tool for attracting and retaining employees. C Corps have more flexibility when it comes to issuing stock options, as they can offer different classes of stock with varying rights and preferences. This can be useful for structuring equity compensation plans. S Corps, on the other hand, are limited in the types of stock they can issue, which can make it more challenging to create attractive stock option plans for employees.

Conversion

One advantage of S Corps is that they can be converted to C Corps relatively easily. This can be beneficial for a growing business that wants to take advantage of the benefits of being a C Corp, such as the ability to have more than 100 shareholders or issue different classes of stock. On the other hand, converting a C Corp to an S Corp can be more complex and may have tax implications for the shareholders.

Conclusion

Ultimately, the decision between forming a C Corp or an S Corp will depend on the specific needs and goals of the business. C Corps offer more flexibility in terms of ownership and stock options, but they are subject to double taxation. S Corps, on the other hand, have restrictions on ownership and stock options, but they offer pass-through taxation. It is important for business owners to carefully consider these factors and consult with legal and tax professionals before making a decision.