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Differences Between S and C Corporations

Differences Between S and C Corporations

If you are planning to form a corporation, it is essential that you choose the right entity for your needs. Numerous options are available, and it is a good idea to consult with a business lawyer as you plan your business and set up the articles of incorporation.

The C Corporation

As its own separate legal entity, a C corporation may fit your needs if you prefer a corporation that will allow shareholders protection from financial problems and other issues that may arise. As a standard corporation, you will need to file with the state and pay a filing fee.

If you are unsure that a C Corporation is right for you, consider these details:

• C Corporations offer limited liability protection from debts or other liabilities.
• C Corporations are separately taxed, which means that you will pay a corporate tax. Keep in mind that this opens you up to double taxation, in the event that you pay dividends to your shareholders.
• C Corporations lack the ownership restrictions of S Corporations.

The S Corporation

If a C corporation does not conform to your business needs, an S corporation may be a better option. While formation also requires filing with the state and paying fees, S Corporations benefit from special taxation.

• S Corporations offer the same limited liability protection as C Corporations do.
• S Corporations use “pass-through” taxation, meaning that you will not be taxed twice.
• S Corporations are restricted to no more than 100 shareholders, which may appeal to small businesses.

Although these two entities share many similarities, their differences will allow you a greater range of choices when deciding how to form and run your business. Generally speaking, S corporations are better suited to smaller entities, whereas a C Corporation can be or develop into a very large business.

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