Difference Between S-corp and C-corp Businesses
Difference Between S-corp and C-corp Businesses Photo by Austin Distel on Unsplash

If you're in the process of deciding which business structure works for you, maybe you are a bit confused about which business entity matches your company. Let's talk about three of the most popular options when it comes to this: S-Corp, LLC, and C-Corp.

But which of the three options should you pick? Professionals in varying industries will have differing opinions on this one. A lawyer might look at it from the point of view of assets, liability protection, and the legalities. A financial analyst could focus on which of the three will satisfy their organization's credit needs.

How do you know which business structure can help you meet your long-term goals?

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How to Determine Your Post Preferred Entity

As a start-up business owner, ask yourself the following questions:

  • Does your business need little paperwork?
  • Does it have to be easy to set up, or do you want to raise your capital?
  • Do you need a business entity that will protect your assets and liabilities?
  • Do you want to lower your audit rates or increase tax benefits from your business?

Your answers to the questions mentioned above will determine the type of organization you'll want to consider, especially when it comes to the importance you place on each of the above.

Similarities between S-Corp, C-Corp, and Limited Liability Company

  • All are considered legal entities with legal rights and obligations.
  • They're all protected under the law with rights and privileges clearly outlined in the constitution.
  • They help you safeguard personal assets from your business.
  • They allow you to conduct limited liability -- shareholders will have a certain extent of their nominal value of the shares to take the legal responsibility of the debts.
  • They allow you to raise capital. It could be through debts, loans, investors, or credit cards.
  • With each, you can separate personal and business credit.

Major differences between S-Corp and C-Corp

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Their differences stem from four key areas:

  • Tax status
  • Tax deductions you are allowed to take
  • Who can own the entities
  • The amount of required paperwork for asset protection

The S-Corporation

S-Corporations choose to pass deductions, losses, corporate credits, and income through to their shareholders for federal tax purposes. Its ownerships should include no more than 100 U.S. citizens or residents, and they can't be in other S-Corp, LLC, partnerships, or certain trusts.

Their tax rates are assessed at their income, which prevents double taxation on their corporate income. They also need to hold the annual general meetings and keep the minutes recorded.

Qualifications for S-Corporation Status

  • They can have 100 shareholders or less.
  • They must be a domestic corporation.
  • Shareholders can be individuals, estates, or certain trusts with no corporations, partnerships, or non-resident shareholders.
  • It's compulsory to have only a single class of stock.
  • The corporation can't be ineligible.

Advantages of S-Corp

  • Its taxation resembles a partnership, where the income is taxed at the personal shareholder level versus the corporate level.
  • Individual corporate penalty taxes are not applicable.
  • They're separate legal entities that provide afforded protection to their shareholders.

Disadvantages of S-Corp

  • It has restricted ownership.
  • Dividend received reductions are not applicable.

The C-Corporations

They are separate taxable entities that file corporate tax returns different from personal tax returns. They face the risk of getting double taxed on corporate profits. Then if those corporate profits are distributed as shareholder dividends, they'll be taxed a second time.

On the other hand, C-Corporations are unlimited when it comes to the number of shareholders. Most states will require that you hold annual meetings and record the minutes. Certain deductions are allowed only for C-Corporations for certain fringe benefits, like retirement deductions.

Advantages of C-Corporations

  • There are no shareholder restrictions.
  • It's a separate existence.
  • Shares can easily be transferred.
  • Stock options are available on offer.
  • The legal precedents are well established.

Disadvantages of C-Corporations

  • It's more complex to operate because of its inclusive formalities.
  • Double taxation can be a challenge to investors.

The Limited Liability Company

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An LLC company combines the tax flexibility of a partnership with the personal liability protection of a corporation. Even so, you can still choose how you want the LLC to be taxed, either as a sole proprietorship, partnership, or a C-Corporation. The default status is as a partnership. The LLC owners report their profit or loss on their tax returns.

There are no limits when it comes to the number of shareholders or who their owners are and where they come from. No annual meetings or meeting minutes for asset protection purposes are necessary, although they're recommended for raising the capital.

Advantages of LLC

  • There are less corporate formalities compared to C-Corp and S-Corp.
  • Owners receive limited liabilities.
  • LLCs are highly flexible when it comes to taxation.

Disadvantages of LLC

  • The gains or profits received might be subject to self-employment taxes.

Conclusion

Before you choose between an S-corp or a C-corp for your new company, evaluate it from these different perspectives. As you take the time to understand the ins and outs of your business, you can base your decision on long term performance and goals, not just short term solutions.