S Corporations and C Corporations are two very different types of business entities recognized for legal and taxation purposes. The corporate structures protect individuals from personal liability. They permit a legal identity and uninterrupted conduct of business without regard to the particular individuals involved. They share the same general type of organization, which typically includes directors and shareholders. But there are substantial differences between the two.
S Corporation vs. C Corporation: Differences
The number of shareholders allowable is unlimited for a C Corporation, but must number 100 or less for the S Corporation. The S Corporation must be domestic and all stockholders US citizens. There are differences in the filing requirements for the two corporation types. To set up the S Corporation, Form 2553, signed by all shareholders, must be filed in the year of formation. S Corporations can only issue one class of stock, which can limit flexibility and increase the difficulty of attracting investors. Perhaps the most significant difference in the two types of corporation concerns the ways that they are treated for tax purposes. In the C Corporation, the corporate entity is taxed at the corporate rate, and shareholders are additionally taxed personally on income or dividends received. So there is effective double taxation. In the S Corporation this double taxation is avoided. The corporate entity is not taxed, but is a pass-through entity, with income and dividends subject to taxation through the individual returns of the shareholders. The Tax Cuts and Jobs Act (TCJA), which took effect in 2018, cut the corporate tax rate from 35% to 21%, but this double taxation of C Corporation income still exists. The new tax law also allows a 20% business income deduction for pass-through entities such as S Corporations, although additional income limits and restrictions do apply.
Which Structure is Best?
So which corporate structure is best for you? That is a complex question best answered by your accounting professional. In general, avoiding the double taxation of the C Corporation is beneficial for many organizations(especially small business). But there are circumstances in which filing as a C Corporation can be the better choice. Also, the requirements for filing as an S Corporation are more stringent. The selection of corporate structure is a decision whose effects permeate almost every aspect of your business. As the Small Business Administration notes, this choice affects your income, your paperwork, your filing status, how much you pay in taxes, and your ability to raise funds.
State regulations vary on S Corporation status as well. Many states recognize and treat them in the same manner the Federal Government does. Some states don't recognize them at all and treat them in the exact same manner as C Corporations. For other states, profits above certain limits are taxable. This is another area where consulting a tax professional has undeniable benefits. Complex organizational legal and tax ramifications make this one of those decisions where the wisest course is to consult established, reputable Certified Public Accountants such as Chandler & Knowles CPAs PLLC.