S-Corp vs C-Corp

Many businesses are registered as S corp and more businesses keep choosing it. However, some businesses still register as C corp, and this may generate concerns; what is the difference between the two?

What is an S Corporation?

An S corporation, also known as an S corp, is a special type of corporation designed to avoid the double taxation problem that regular C corporations face. S corporation profits and losses can be passed through to the owners' income without ever being subject to corporate tax rates.

Although not all states tax S corporations equally, the vast majority do so in the same way that the federal government does and tax their shareholders proportionately. Some states tax S corporations on profits over a certain threshold, while others ignore them entirely and treat them like a C corporation.

The Internal Revenue Service (IRS) requires S corporations to apply for S corp status, which is a different process than simply registering a business.

S-corporations have their own set of rules. For instance, they are limited to a total of 100 stockholders, all of whom must be US citizens. You'll still have to adhere to the corporation's stringent filing and operational requirements.

S-Corp Taxation

One of the most significant advantages of S Corporations is the reduction in taxes. Business income and loss must only be reported on personal income tax returns. On their tax returns, most S Corps can deduct up to 20% of their business income. If you have an S Corp, you can deduct the losses from your business on your tax return.

S Corp Pass through taxation diagram

Advantages of S-Corps

If you want to have limited ownership, an S Corp is the way to go. These companies are limited to 100 shareholders, all of whom must be citizens of the United States. There are no restrictions on the types of shareholders who can own stock. If you want to avoid being ranked, an S Corp is the way to go.

What is a C Corporation?

A C corporation (or C-corp) is a legal entity in which the owners, or shareholders, are taxed separately from the corporation. C corporations, the most common type of corporation, are also taxed on their profits. Profits from a business are taxed at both the corporate and personal levels, resulting in a double taxation situation.

S corporations and limited liability companies (LLCs), for example, are similar in that they separate a company's assets from its owners, but they have different legal structures and tax treatment.

Corporations pay corporate taxes on profits before distributing the remaining funds to shareholders as dividends. The dividends received by individual shareholders are then subject to personal income taxes. While double taxation is a disadvantage, the ability to reinvest profits at a lower corporate tax rate is a benefit.

C Corporations are taxed twice: the company pays corporate income tax, and shareholders pay federal income tax via dividends. Pass-through taxation applies to S Corporations. On a personal tax return, shareholders report business income and losses. As a result, the only taxes they have to deal with are those on their tax returns. There is no corporate tax in the United States.

C-Corp Taxation

If your charitable contributions and donations do not exceed 10% of your company's income, you can deduct 100 percent of them on your corporate tax return. You can also assist your employees by deducting certain benefits, such as health insurance.

C corp double taxation diagram

Advantages of C-Corps

The ownership of C Corporations is unrestricted. A-C Corp is preferable if you plan to sell your company in the future or if you want to raise money from investors. There is no limit to the number of shareholders you can have. It's much easier to sell stock to potential investors if you're a C Corp.

Which business structure should you choose?

The scorecard for your small business could tip either way based on these factors. A seasoned tax professional can determine which option will provide your company with the greatest tax benefit. A business lawyer can help you navigate the complexities of ownership and profit distribution.

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