S Corporation vs. C Corporation: Know The Differences And Similarities

One question that hits every business owner’s mind while starting a business is whether to go for S corporation or C Corporation?  The following article explains the points of differences and the similarities between both, whereas the choice for the same depends on the goals of the business.

Points of differences between S and C Corporation

• Formation – C Corporation is a type of corporation which is designated to the company by default when it files its article of incorporation. If a company wants to turn into an S corporation, it has to file a form 2253.

• Taxation – One reason why most people chose S Corporation over C Corporation is taxation. There is double taxation in the case of C Corporation in which there is the corporate tax as well as the tax on shareholders dividends. Whereas in S corporation, shareholders are not taxed as a corporation and pay taxes at the individual level.

• Ownership – Anyone can become the owner of C Corporation, you do not have to be a US citizen or permanent resident, and additionally, there is no such restriction on the number of shareholders. In the case of S corporation, there is a limit of 100 shareholders, and they must be the US citizen to become the owners.

Points of Similarities between S Corporation and C Corporation

Both structures get their names from the parts of the Internal Revenue Code (IRC) under which they are taxed.  C Corporations and S Corporations are taxed under Subchapter C and Subchapter S, respectively. There are a few more similarities which are listed below –

• Limited liability – Both C and S Corporations enjoy limited liability protection, which means that the shareholders are not at all responsible for the financial obligations of the company.

• Separate Legal entity – C Corporation and S Corporation can both enjoy the advantage of a separate legal entity, and both corporations require the filing of Articles of Incorporation with the state.

• Incorporation – C Corporation and S Corporation are incorporated in an identical manner. One must complete the proper incorporation documents, file articles of incorporation, appoint a registered agent, and create corporate bylaws.

• Corporate formalities – Both S Corporations and C Corporations are required to have the same formal filings, annual meetings, and must pay annual fees. Both must have bylaws, issue stock, and are usually required to have a Board of Directors.

The choice for the type of entity plays a considerable role when it comes to the matter of taxes, financing, and other strategies. The decision of choosing the best type for your company depends on the needs and the goals of the business. The companies can decide by considering all the factors of both types.