C Corporation versus S Corporation

The easiest way to explain the difference between a C corporation and an S corporation is by relating them to siblings. The two are very similar, but each have their own identity that defines them. In this case, think of a C corporation as the big brother and an S corporation as the little brother.

How does taxation vary between the two?

A C corporation is treated as a separate taxable entity by the IRS, and therefore income is taxed at the corporate level and again at the personal income tax level when dividends are paid out to the shareholders. That means double taxation. Much like little brother gets away with more, S corporations seem to as well. S corporations are only taxed at the personal income level for the shareholders, not on the corporate level.

How to elect S corporation status?

By default, corporations are C corporations when they are incorporated within their state. A C corporation can only become an S corporation when all the shareholders consent to filing with the IRS as an S corporation.

Restrictions.

Unlike C corporations, S corporations cannot have more than 100 shareholders, and all the shareholders must be either US Citizens or US residents. Moreover, S corporations can only have one class of stock (disregarding differences in voting rights), whereas C corporations can have different classes of stocks. Other restrictions are enumerated by the IRS in its Instructions for Form 2553.

It’s all relative.

Each corporation has its pros and cons. S corporations are generally preferred for smaller businesses, whereas C corporations are generally preferred for bigger companies or companies looking to go public (have an IPO). It’s important to consider where your business is now and where you want it to be. If you need assistance incorporating your business, contact Johnsen Law for any and all legal assistance.