- HoneyHat

What does a C Corp mean?

A C Corporation is an organization that is run by its board of directors. C Corps are taxed according to Subchapter C in the Internal Revenue Code and issue shares to shareholders. C Corporations are large US companies like Walmart and Microsoft, which means their shareholders are protected against business-related liabilities.

C Corps are the default type of corporation in most US states. The firms pay tax on their corporate income and the shareholders pay tax on dividends. C Corp owners face double taxation.

Shopify : Click here to launch your online business

The pros and cons of C Corps

There are many benefits to operating and forming a company as a C Corp, beyond the limited liability of shareholders.

C Corps Advantages

Stock sales do not limit the amount of money that can be raised.
Stocks are freely transferable; corporations and individuals alike can own them.
This is a great investment for those looking to generate passive income.

The disadvantages of C Corps

C Corps are more expensive to set up than other business structures
Business operations become more complex when they require structural elements like boards of directors.
C Corps are subject to double taxation.

How do I form a C Corp

Do you want to create a C Corp.? Follow these steps:

Choose a unique business name.
Name a CEO, a board of directors and a registered agent.
Submit articles of incorporation to your state secretary.
Create and submit a company bylaw.
Issue stock.
Register with the Securities and Exchange Commission if you are issuing shares to more than 35 shareholders.
Applying for business licenses in your locality and state
To obtain an employer identification number, submit Form SS-4 to IRS.

What is an S Corp.

S Corporations (S Corporations) are legal entities with a taxation status that allows them to pass through income. This status allows the corporation to transfer all corporate incomes, credits, deductions, and losses to its shareholders to be taxed at federal level. These distributions are included in the personal tax returns of shareholders, who pay tax at their own individual rates.

The pros and cons of S Corps

S Corps provide a variety of benefits for business owners and investors. There are a few downsides to registering as an S Corp.

Benefits of S Corps

S Corp shareholders are protected from liability by a limited amount of protection. The business entity is separate.
Shareholders’ assets are not affected by legal disputes affecting the business.
S Corp is a pass through entity that allows corporate profits and losses to go directly to the shareholders.
S Corp owners do not have to pay federal tax on their company’s profits.
Shareholders benefit from personal income tax rates when it comes to distributions.
S Corps are able to reinvest their profits at a lower rate of tax than other entities.

The disadvantages of S Corps

S Corps are limited in their ability to raise funds through the issuance of shares. They can only have 100 shareholders who are not corporate US citizens or permanent residents.
S Corps often come under IRS scrutiny because of their tax pass-through benefits. These can be used to disguise taxable payments, such as employee payments, as pass-through distributions.

How to Form an S Corp

If you are a small-business owner, then you must meet the following requirements to form an S Corp:

Pick a unique business name.
Name your corporate officers and board of directors.
Record the minutes of your annual board meetings.
Send articles of incorporation to the secretary of state in your state and to the US Internal Revenue Service.
Create bylaws that guide the stock issuance, meetings and board votes. Also, file any changes to board members.
You can issue stock to up to 100 US citizens who are not corporations.
Submit a Form 25,53 (also known as an Election by a Small Business Corporation) to the IRS.
Obtain a business license at the local, county and state level.
Submit a Form SS-4 to the IRS in order to request an employer identification number.

C Corp vs. S Corp – similarities and differences

Fundraising

Similarities Both S Corps and C Corps raise money by selling stocks.

Differences C Corps may issue both preferred and common stock, whereas S Corps can only issue one class of stock.

Operation

Similaritiesspan size=”font-weight 400 ;”>: S Corps and C Corps both require detailed records, annual meetings and a board. Both operate under bylaws.

Differencesspan size=”font-weight 400 ;”>: S Corps and C Corps have similar operational requirements. Both entities must adhere to company bylaws that govern stock issuance, board meetings, and governance of the board.

Taxes

Similaritiesspan font-weight=”400 ;”>: Shareholders of both S Corps (S Corporations) and C Corps (C Corps) pay tax at the personal rate for corporate distributions. Both structures also protect the personal assets of shareholders from corporate liabilities.

C Corps are subject to double taxation, as they pay corporate taxes and dividends. S Corps can avoid double taxation by using pass-through taxes, which allows shareholders to pay only personal income tax on company distributions.

Shareholders

Similarities Both S Corps (S Corporations) and C Corps (C Corps) allow multiple owners via shareholders.

Differencesspan size=”font-weight 400 ;”>: S Corps are limited to only 100 US citizens and permanent residents. C Corps do not have such restrictions and can sell shares to any foreign or domestic entity.

The next step

To choose between a C Corp or S Corp, you must answer several important questions.

Do you plan to raise funds through the issuance of stocks?
Do You anticipate having foreign investors or business entities as your clients?
What is your vision of the shareholder pool in five years’ time?
Do you plan to sell your business in the future?
Are you prepared to handle increased IRS scrutiny or double taxation?

These questions will help you determine whether an S Corp is the best option for your company. Don’t forget that these aren’t the only options. Your startup may be better served by an LLC, partnership or sole proprietorship. When making this decision, keep in mind your specific business objectives.

C Corp vs. S Corp FAQ

What is the difference between a C Corp and an S Corp?

You can determine a company’s status by consulting its public records. This includes the articles of incorporation and IRS filings. You can also contact a representative of the company to get the details.

What is the Difference Between an S Corp & a C Corp?

Ownership and taxation are the two main differences between an S Corp. and a C Corp. Profits and losses in S Corps are transferred to the personal tax returns of shareholders. C Corps, on the other hand, are taxed independently from their owners with potentially higher tax implications. A C Corp is more flexible, but it’s expensive to set up and can be subject to double taxes.

What is better, an LLC or S Corp?

Be sure to consider your personal goals and needs when choosing a business model. If you are looking for flexibility, then LLCs will provide it. There are many ways to manage ownership, operations and taxes. S Corporations are a good choice if avoiding excessive taxation is important. S Corporations help shareholders to avoid double taxation, and sometimes they even give them tax benefits. The ideal corporation status depends ultimately on your business objectives and needs.

Which is lower in taxes, a C Corp. or an S Corp.

C Corporations pay more taxes on average than S Corporations. S Corporations are passed-through entities. This means that their earnings are distributed among shareholders. The shareholders are taxed at the personal income tax rates, which are typically lower than corporate tax.

Shopify allows you to sell online.

Get a free trial

Learn more about the benefits of a membership.

Author: Adeel Qayum

Need Help Finding B2B Service Provider?

Table of Contents