Key features distinguish S corporations from C corporations. Both have specific characteristics all business owners should realize.
Here, we’ll discuss the main differences between them, and which is most likely to benefit your business.
Ownership Differences Between S Corporations and C Corporations
A significant difference concerns shareholders and general ownership. The International Revenue Service (IRS) imposes many restrictions specifically relating to S corporations.
All shareholders must be confirmed US citizens, and S corporations can’t exceed 100 shareholders. S corporations are only eligible to have one sole type of stock, and cannot be owned by other S corporations, C corporations, partnerships, or limited liability companies.
As opposed to S corporations, C corporations don’t currently have any shareholder restrictions. C corporations can also have more than one stock type.
Taxation Differences Between S Corporations and C Corporations
Taxation is often considered the primary reason business owners switch to becoming an S corporation. It’s essential to understand all differences in full to make the best decision.
Referred to as a flow-through business, S corporations require owners to file a federal tax return using Form 1120S. However, all profits and losses are “flowed-through” the business—and ultimately reported on the personal tax return of the owner.
As a result, an S corporation pays no income tax at the corporate level. It’s paid individually by all owners responsible.
In contrast to S corporations, owners of C corporations pay tax at the corporate level. A tax return is filed using Form 1120, and business income may be shared between owners as dividends.
If this occurs, taxation will arise twice. All C corporation income tax is first paid at the corporate level, with all associated dividends then taxed across the individual returns of the owners.
S Corporations vs. C Corporations: Which Provides Greater Benefits?
What constitutes greater benefit depends solely on the circumstances of your specific business. Generally, S corporations suit smaller businesses because of the tax savings provided.
However, if you’re seeking to increase capital and eventually sell stock on a global scale, remaining a C corporation is likely to be the most beneficial. S corporation restrictions could hinder business ambition due to reduced flexibility.
If you’d like more advice on which corporation is the best choice for your business, contact the business consultants at MKS&H today.