Difference between C Corporation and S Corporation : When it comes to corporations, C Corp. and S Corp. are pretty much the talk of the town.
Often people do not really understand the truth on these two classifications of a corporation.
If you are deciding to switch your business into either one, you will need to know the difference between C Corporation and S Corporation.
What is C Corporation
C corporation (or C corp.) is the default or standard norm when you decide to switch from any other type of business to a corporation.
This means that upon approval to being a corporation, you will automatically be classified as a C corp.
This is true if you have not specifically applied to become otherwise.
C corps. are subjected to double taxation. First, they are taxed on the profits of the corporation via corporate tax.
And second, they are taxed again on the dividends distributed among the shareholders via individual tax.
With C corps., there are less restrictions as compared to S corps.
What is S Corporation
Meanwhile, S corporation (or S corp.) is a type that has specialized taxation with the IRS.
The name is in association to the Subchapter S of the United States Internal Revenue Code.
If you decide to switch to this type of entity, you will be required by the IRS to submit Form 2553. Additionally, your business must be able to meet all the stringent S corp. guidelines.
On the other hand, S corps. are under a specialized taxation. They are subjected to a single “pass-through” taxation.
This means that the profits or losses are passed through the corp and on to the shareholders to reflect on their respective income tax returns. Hence, only individual taxes and no corporate taxes.
Most of the time, this particular taxation manner is the main reason why companies are switching to become S corps.
An S corp. has standard limitations when it comes to various aspects. For instance, it has a maximum limit of 100 shareholders while C corps. can have as many as they deem necessary.
Also, non-US entities and citizens, other corps, LLCs, partnerships, and some trusts are not allowed to own or manage the S corp.
And, in contrast to the various classes of stocks involved in a C corp., an S corp. is limited to one class of stock only regardless of voting rights.
Difference Between C Corporation and S Corporation
The major difference between C corp. and S corp. is as to the manner by which they are taxed by the IRS.
One is that they are both applied through the state by filing documents that include the Articles of Incorporation or Certificate of Incorporation.
Second is that they both adhere to the same standard formalities and obligations such as adopting bylaws, holding regular meetings with directors and shareholders, issuing stocks, submitting annual reports, and paying annual fees and taxes.
Third is that they observe the same corporate structure, which generally involves a Board of Directors for management, a set of corporate officers for daily activities, and the shareholders themselves for corporate approvals and election of officers.
And fourth is that both C corp. and S corp. feature a limited liability protection so shareholders are not held personally liable for any liabilities the corp itself may incur.