C Corporations vs. S Corporations

Attribute	C Corporations	S Corporations
Taxation	Double taxation - corporate profits taxed at corporate level and dividends taxed at individual level	Pass-through taxation - profits and losses passed through to shareholders and taxed at individual level
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 board of directors and officers	Managed by shareholders and directors
Stock	Can issue multiple classes of stock	Only one class of stock allowed
Employee Benefits	Can provide more extensive employee benefits	Restrictions on types of employee benefits that can be provided

Overview

When starting a business, one of the key decisions that entrepreneurs need to make is choosing the right legal structure for their company. Two common options are C Corporations and S Corporations. Both types of corporations offer limited liability protection to their owners, but there are some key differences between the two that can impact taxation, ownership, and other aspects of the business.

Taxation

One of the main differences between C Corporations and S Corporations is how they are taxed. C Corporations are subject to double taxation, meaning that 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 Corporations. On the other hand, S Corporations are pass-through entities, which means that 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 Corporations.

Ownership

Another key difference between C Corporations and S Corporations is ownership restrictions. C Corporations can have an unlimited number of shareholders, and they can be individuals, other corporations, or even foreign entities. This flexibility can make it easier for C Corporations to raise capital through the sale of stock. S Corporations, on the other hand, are limited to 100 shareholders, all of whom must be U.S. citizens or residents. This restriction can make it more challenging for S Corporations to raise capital.

Management

When it comes to management structure, C Corporations and S Corporations are similar in that they both have a board of directors who oversee the company's operations. However, the day-to-day management of the company may differ. In a C Corporation, the board of directors appoints officers who are responsible for running the company on a daily basis. In an S Corporation, the shareholders typically play a more active role in the management of the company, as they are often involved in decision-making processes.

Formation and Compliance

Forming a C Corporation or an S Corporation involves similar steps, such as filing articles of incorporation with the state and adopting bylaws. However, there are some differences in compliance requirements. C Corporations are subject to more stringent regulations and reporting requirements than S Corporations. For example, C Corporations are required to hold annual meetings of shareholders and directors, keep detailed records of corporate activities, and file annual reports with the state. S Corporations have fewer compliance requirements, which can make them easier to manage for small businesses.

Liability Protection

Both C Corporations and S Corporations offer limited liability protection to their owners, which means that the personal assets of shareholders are generally protected from the debts and liabilities of the corporation. However, there are some limitations to this protection. For example, shareholders of both types of corporations can still be held personally liable for their own actions or for certain types of debts, such as unpaid payroll taxes. It's important for business owners to understand the limits of liability protection when choosing between a C Corporation and an S Corporation.

Conclusion

In conclusion, C Corporations and S Corporations are both popular choices for entrepreneurs looking to start a business. Each type of corporation has its own advantages and disadvantages when it comes to taxation, ownership, management, formation, compliance, and liability protection. It's important for business owners to carefully consider their specific needs and goals when deciding between a C Corporation and an S Corporation, as the choice of legal structure can have a significant impact on the success and growth of the business.