S Corps and C Corps are two of the most common business structures in the United States. Each structure has unique merits, in addition to sharing several facets in common.
Both S Corps and C Corps protect owners and shareholders from personal liability in situations like lawsuits and bankruptcy, but each structure gets different treatment when it comes to taxation.
Figuring out which structure is best for your business is an important step for any start-up. In this guide, we’ll explain the differences and help you choose the one that’s right for you.
As mentioned above, both S Corps and C Corps provide liability protection to their owners. This means that owners and shareholders cannot be held personally liable for financial losses or debts accrued by the business.
Corporations, regardless of structure, must fulfill some basic compliance requirements in order to maintain their status.
The most significant difference between S Corps and C Corps is in the way these two types of entities are taxed.
C Corps are subject to what is referred to as “double taxation.” Under the tax code, C Corps are required to pay taxes on any retained profits at the corporate level, as well as at the individual level in the form of income. Owners seeking to be paid through dividends will thus be stuck paying extra tax.
S Corps are still permitted to retain profits, but owners only pay taxes on the individual level. This is what’s referred to as a “pass through” tax structure: profits and losses are passed through the business to the company’s shareholders, and appear on their personal tax returns.
This is where C Corps get their competitive edge. Unlike S Corps, C Corps can offer an unlimited number of shares to an unlimited number of shareholders, and thus have no hard limit on growth.
C Corps can offer stock options to employees, and deduct the cost of employee benefits from its taxable income. C Corps also benefit in their ability to issue multiple classes of stock, which grants even greater flexibility to business owners.
While S Corps can also raise capital by offering stock, there are limits. S Corps cannot have more than 100 shareholders, and cannot make an initial public offering (IPO).
Unlike C Corps, S Corps can only issue one kind of stock (voting and non-voting shares are permitted, however).
Qualified C Corps (like LLCs, which only provide liability protection) may elect to be taxed as S Corps, so long as they fit certain criteria. To qualify, your business must:
Both S Corps and C Corps have advantages and disadvantages. The structure that is best for your business depends on your unique needs and goals.
Because they allow for an unlimited number of investors, it’s more common for large businesses to be C Corps than S Corps.
But that doesn’t mean S Corps are never the right idea, or that organizing as an S Corp means your business won’t be able to grow at all.
Regardless of which you choose, be sure to be aware of the compliance requirements to make sure you don’t lose corporation status.
If you’re still feeling unsure, take Firstbase’s free survey to help figure out which company structure is right for you.