S corp vs C corp? It’s one of the first questions someone about to incorporate a business asks him or herself. When trying to decide between an s corporation or c corporation, you should ask your legal or tax advisor. If you don’t have one, read everything you can on the subject. You will probably also want to do the corp vs llc comparison as well
S Corp vs C Corp - Advantages of Incorporating Either S Corp or C Corp
Both S corporations and C corporations have similar advantages:
- Shareholders’ personal assets are insulated against any debts, judgments or other obligations of the corporation (so long as the shareholders observe corporate formalities).
- In most cases, the largest amount a shareholder can be liable for in a judgment against the corporation is his or her amount of stock in the corporation (but there can be personal liability for fraud, failure to withhold/ pay employment taxes, etc).
- Corporations can raise capital by selling stock.
- Corporations may deduct the costs of benefits it provides to officers and employees (e.g. health insurance premiums, parking, etc.).
S Corp vs Corp – The Similarities
S corporations and C corporations have the same basic corporate advantages. Both are incorporated at the state level and both are treated as separate and distinct entities from their shareholders.
Both C corporation and S corporations can be sued, enter into contracts, and are managed by officers who are elected by the board of directors. In many small corporations (s or c), the board and officers may be as few as one person, with that one person holding all the offices.
S Corp vs C Corp - Differences
After incorporating with the state, a corporation has up to 75 days to file IRS form 2553 and elect S corporation status. Some states (like California) also have S corporation applications that also must be filed.
The S corporation status enables the shareholders to treat the earnings and profits as distributions and have them pass through directly to their personal tax return.
Because an S corporation is a pass-through entity, there are some restrictions. There can be no more than 100 shareholders and all of the shareholders must be U.S. citizens or resident aliens. Further, neither C corporations nor LLCs can be shareholders.
View the entity comparison chart for more questions about S corp vs C corp