S Corp vs. C Corp: What's the Difference? | Nav (2024)

• An S corporation and a C corporation are two types of business entities.
• Legally, they’re both considered corporations, but there are several key differences when it comes to ownership, taxes and costs.
• Most entrepreneurs who choose an S corporations do so for tax purposes.
• We’ll compare what these two types of business entities, the similarities and key differences of an S corps vs. a C corp, and the advantages and disadvantages of each.

What Is a Corporation?

A corporation is a separate legal entity from its owners. The corporation can perform many activities individuals can, such as getting a small business loan, entering into contracts with individuals or businesses, and hiring or firing employees.

What Is a C Corp vs. An S Corp?

When you form a corporation at the state level, you file articles of incorporation (or in some states, a certificate of incorporation) with the Secretary of State or other agency responsible for corporate registration. The state doesn’t care whether you plan to operate as a C corp or S Corp; it simply recognizes a business as a corporation.

It’s only after the business formation has been completed that you elect to be treated as an S corporation by filing paperwork with your state and the Internal Revenue Service (IRS).

An LLC may also elect to be treated as a C corporation or S corporation for tax purposes by filing paperwork with the IRS.

S Corp and C Corp Similarities

Considering that every corporation starts the same way, by forming a corporate entity at the state level, it’s not surprising that there are similarities between S and C corporations.

Taxation

Corporations must report income and expenses to the IRS, and applicable taxes must be paid at the state, federal and/or local level.

Ownership

Both types of corporations have shareholders who are owners of the corporation. Certain corporate formalities must be followed, such as issuing stock, adopting bylaws, appointing a registered agent, and holding shareholder meetings. Both must have a board of directors.

If those formalities are followed, the owners won’t be personally responsible for debts or other liabilities the business incurs.

Cost

Most states require all corporations to file an annual report or statement of information (some require biennial reports).And in many cases, states may require all corporations to pay an annual (or biennial) filing fee.

S Corp vs. C Corp Differences

So what’s the difference between the two?

First, let’s reiterate that the S corporation is a choice that’s made for tax purposes. A corporation can elect to be taxed under Subchapter S of the Internal Revenue Code by filing IRS Form 2553 with the IRS. When it does, it’s recognized as an S corporation. If it does not, it will be taxed under Subchapter C of the IRS code and be taxed — you guessed it — as a C corp.

Not all corporations may choose S corp status; to do so the business must meet certain IRS requirements regarding the maximum number and type of shareholders, as we’ll cover in a moment.

Taxation

C corporations get taxed twice: the corporation itself pays applicable corporate income taxes at the corporate tax rate and shareholders pay federal income taxes on dividends. This is referred to as “double taxation.”

S corporations are what’s known as “pass-through entities.” The S corp doesn’t pay taxes itself; instead shareholders (owners) report business income (and possibly losses) on their personal tax returns. There’s no corporate tax.

Ownership

C corps don’t have restrictions when it comes to ownership. Anyone can be shareholders, including other businesses and foreign individuals or entities. There can be as many owners as you’d like.

With S corps you are limited to 100 s corp shareholders who must be individuals and U.S. citizens.Shareholders cannot be nonresidents or other corporations, for example.

Another important distinction is that S corporations only have one class of stock while C corporations may have multiple classes of stocks (such as preferred or common stock).

Cost

C corporations are typically the most expensive when it comes to filing taxes, paying taxes and maintaining the corporation.

S Corp vs. C Corp Tax Differences

The biggest difference between a C corp and S corp is how they will be treated for tax purposes. C corporations pay tax on their income at the corporate level, plus shareholders pay taxes on the profits distributed as dividends.

S corporations don’t pay income taxes directly. Instead they file IRS Form 1120S; that’s an informational return that reports income and expenses to the IRS. Profits or losses will then be reported on Form K-1 that the owners file with their personal tax returns. Again, profits or losses flow through to the individual shareholders.

S corp tax status

Tax benefits are among the S corporations’ biggest advantage. S corp owners report business income and loss on their personal income tax returns and they may be able to lower their tax bills in several ways.

1. Business owners may be able to take advantage of legally available tax deductions, such as the home office deduction, auto mileage expense deduction and more.
2. S corp owners who work in their business may achieve tax savings by paying themselves a salary subject to payroll taxes, then taking some income as distributions not subject to payroll taxes. This can result in lower payroll taxes than, say, a business operating as a sole proprietor who has to pay the full self employment tax.
3. S corp owners may deduct up to 20% of qualified business income on their personal tax returns using the Qualified Business Income (QBI) Deduction created in the Tax Cuts and Jobs Act of 2017.Not all income is eligible (for example, wages are not). Among the eligibility requirements, total taxable income in 2023 must be no greater than $182,100 for single filers and $364,200 if you file jointly. You may be eligible for a partial deduction above those limits but the rules become more complicated. QBI is alsoavailable to sole proprietorships and partnerships but not C corp shareholders.
4. With an S corp, you may be able to deduct business losses on your individual tax returns, subject to certain limitations.

C corp tax status

Corporations file tax returns and pay taxes on corporate profits. Corporations have access to numerous business tax deductions including salaries, health care benefits, retirement plan contributions, education expenses for employees and more.

However, C corporations can’t deduct the money they pay to shareholders as dividends, and C corp shareholders may not have access personally to the tax write-offs owners of other types of business structures do. (You can’t take a home office deduction as an employee of a C corp, for example.) Shareholders also cannot deduct C corp losses on their personal tax returns.

S Corp vs. C Corp Ownership Differences

S corp ownership

If you’re fine with more limited ownership options, an S corp may work for you. Again, you can have up to 100 shareholders who must be U.S. citizens.

Who can’t own an S corp? Another corporation, trust, or limited liability company (LLC).

There’s also only one class of stock allowed.

C corp ownership

C corps don’t have any restrictions on ownership. If you’re planning on selling your company in the future — or looking for funding through investors — a C corp is often preferred. You can have an unlimited number of shareholders. Shareholders can be other C corps, S corps, other corporations, and trusts, and foreign owners are allowed.

Multiple classes of stock are permitted. This means you can have some shareholders who have voting rights and others who do not, for example.

When Does It Make Sense to Be an S Corp?

S corporations are often popular with high earning small business owners of companies with one or two owners who want to reduce their tax burden. As we’ve mentioned before, owners may pay themselves a salary subject to payroll taxes, as well as distributions that are not. In addition, S corp owners may be able to take advantage of various business tax deductions. And they may be able to deduct losses.

In addition to the double taxation of C corps, tax preparation and filing may be more expensive as a C corp.

Overall, an S corp will be easier to form and maintain than a C corp. And when it comes to getting financing you will have plenty of options provided you meet lender’s requirements for time in business and revenues.

Benefits of an S Corp

Benefits of a C Corp

Do You Save Money As An S Corp?

You may save money as an S corp versus a sole proprietorship or a C corp. (LLCs have choices in terms of how they are taxed, and some LLCs elect to be taxed as an S corporation or even a C corp.)

But how much you can save depends on your specific situation. It will depend on how much profit the business makes, your personal income tax rate, and other factors. A tax professional can help you choose the right option for your business.

Why Would You Choose a C Corp Over an S Corp?

If you’re hoping to one day sell your company to another one, or to get venture capital or other investment funding in the meantime, you might want to operate as a C corp. Since C corporations have a lot of flexibility in terms of ownership and the types of shares of stock that may be offered, they are more appealing to investors and may be easier targets for acquisition. Again you can have many many owners as you’d like and different classes of shareholders.

Another potential advantage of a C corporation is that it may be easier to access small business loans and business credit cards without a personal guarantee. The corporation will still need to meet lender requirements in terms of revenue and time in business (startups are risky) but if it does, it may be able to get financing solely in the name of the business.

Which Is Best?

The right business structure depends on your goals for your business as well as other factors like taxes. Many small businesses prefer to be taxed as S corps for tax-saving purposes, but a company that hopes to attract investors, grow into a large company or even to eventually go public may be better off as a C corporation.

Discuss your options with your legal and tax advisors to decide what’s best for your business.

More Options to Consider

You may have options beyond an S corp or C corp. For instance, you can set up your business as a partnership, trust/estate, sole proprietor or LLC. If you plan to be the sole owner of your company, for example, you might choose to operate as a sole proprietor or a single-member LLC.

But keep in mind that as a sole proprietor, there’s virtually no distinction between you and your company. If your company accrues debt, you’re personally responsible for paying it off. And if you don’t, your personal assets could be at risk for that debt.

As an LLC (as with a corporation) there is limited liability protection. In the case of an LLC, liability is limited to the investment you put into your company. Forming an LLC may protect you personally if the business is sued.

And here’s another option to explore: form an LLC and elect to be taxed as an S corporation.

Forming an LLC and choosing to be taxed as an S corporation may be a good way to reduce your tax burden while avoiding some of the corporate formalities associated with a corporate structure.

There’s one more option to consider. You may be able to form an S corporation now and later convert it to a C corporation later. That will involve paperwork and perhaps some additional cost to pay an attorney and/or your CPA to help you with the conversion, but it’s good to know you have options.

You’ll find more business formation resources here.

C Corporations vs. S Corporations FAQs

• Do S corps get taxed twice?

  S corps are not subject to double taxation the way C corps are. Income and expenses flow through to the shareholder’s personal tax returns.

• Is there an annual fee for S corp?

  Most states do require LLCs and corporations to submit an annual report, though some require less frequent reporting. Annual filing fees vary by type of entity (LLC, corporation, or nonprofit) and by state law. They generally are the same for each type of corporation (S or C corp) though.

• Do C corps get tax refunds?

  C corporations may receive tax refunds. Unlike other business entities (S corps or LLCs, for example) that are subject to pass-through taxation, C corporations file corporate tax returns and they may get a refund if they overpaid throughout the year.

• Is a corporation or LLC better for building business credit?

  You can establish good business credit scores with an S corp, C corp, or LLC. The steps for building business credit are the same for each type of entity.

• Which is better S corp or C corp?

  Whether an S corp or C corp works better for your business depends on the business itself and your long-term goals. If you plan to ultimately sell your company or get investment funding, a C corp might make the most sense. However, if you’re hoping to reduce your personal tax burden, an S corp might be best.

• Why choose C corp over S corp?

  A C corp is more attractive to potential investors because there is more flexibility. You can have multiple classes of stock and there’s no limit to the number of shareholders, which is often more attractive to angel investors and venture capitalists.

• How do I know if I have an S corp or C corp?

  A business that incorporates is automatically designated as a C corporation. To be taxed as an S corp, you’ll need to file Form 2553 with the IRS. If you haven’t done that, you’ll file taxes as a C corp. When you file your taxes as an S corp, you’ll use Form 1120-S to report income, gains, losses etc. Corporations file Form 1120 (no “S” a the end.)

• Is S corp better for small business?

  Operating as an S corp can be better for small business owners looking for tax advantages and to avoid double taxation that comes with C corp status. S corps use what’s called “pass-through taxation,” where the business taxes pass through to the business owners’ personal returns. This can help lower small businesses tax liability with the federal government.

• Can I lend money to my C Corp?

  You can lend money to your business but it’s important to set them up properly so they are treated as a loan. If you do not, there may be unintended tax consequences.

• Should my startup be an S corp or C corp?

  Again that depends on your business goals and how quickly you plan to grow your business. There’s no single best solution for every startup. If you want to raise money, you may be better off as a C corporation but if you are looking to avoid double taxation, an S corp (or an LLC taxed as an S corp) can make sense.