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Haile Shaw & Pfaffenberger Attorneys at Law

Understanding the Differences of C Corporations and S Corporations


Looking to Start a Corporation?

Corporations differ from other forms of businesses in the sense that they are independent legal entities that are separate from the people who own, control and manage them. Due to this recognition as an individual entity, they are viewed as a legal “person” in the view of tax laws, and can thus be engaged in business and contracts, can initiate lawsuits and itself be sued. They also must pay taxes.

How are Corporations Taxed?

The C and the S refer to IRS Code Sections. C corps feature a double taxation – one tax at the company level and another tax on profits distributed to shareholders. This double tax is why many people consider S corps, which has only one level of tax. But there are restrictions on ownership of S corps, where as there are no such limits on C corps. There are a variety of tax, operational and financing considerations when determining which type of corporation or other entity to form to best suit your business needs.


C Corporations

A C corporation is a business term that is used to distinguish this type of entity from others, as its profits are taxed separately from its owners under sub chapter C of the Internal Revenue Code. It’s the most common type of corporation in the U.S., as they offer unlimited growth potential through the sale of stocks, there is no limit to the number of shareholders a c corp can have, there are certain tax advantages, and limited liability, meaning they cannot be sued individually for corporate wrongdoings. Keep in mind that c corps comes with double taxation by the IRS, as revenue is taxed at the company level and again as shareholder dividends. This type of corporation is good for businesses that sell products, has employees and a storefront.

S Corporations 

S corporations start out as C corporations but make a special tax election to have income, deductions, etc. taxed directly to shareholders. S corporations are “pass-through” entities for the purpose of taxation, meaning that the business isn’t taxed but profits or losses pass through to the shareholders to include on individual tax returns. That is significant if the business isn’t making a lot of money or incurs a loss because individuals may take that loss against other income on their tax returns. S corporations are limited to 100 or fewer shareholders, but about 97 percent of S corporations have three or fewer shareholders. Also keep in mind that s corps cannot be owned by a c corp, other s corps, LLCs, partnerships, or many trusts.

Of course, we at Haile Shaw & Pfaffenberger believe that consulting with a lawyer is the safest bet when forming a corporation. A carefully planned legal strategy is an important element of any business or corporate entity. Our Corporate & Business law team provides skilled legal advice in all aspects of Corporate and Business law including entity structuring, the sale and purchase of businesses, asset leasing, advice on shareholder and partner concerns, legal audits, e-commerce and more.

Ready to form a corporation or other business entity?

We’ll help you get started.

Give us a call at 561-627-8100.

Source: http://www.businessdictionary.com/article/37/what-is-a-c-corporation/

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