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What’s the difference between a C- and S-corporation?

Starting a business is an exciting adventure. Just like a physical adventure, starting a new business involves making a lot of choices.

One choice, that is especially important at the start of the business journey, is deciding what structure you want your business to take.

What is a C-corporation?

A C-corporation is the standard form of a corporation. Filing for a C-corporation involves filing articles of incorporation to your secretary of state.

Pros of a C-corporation:

  • Easier to form: C-corporations are easier to form than S-corps.
  • Flexible ownership options: C-corporations allow for unlimited owners to participate in the business. Furthermore, C-corporations can issue “preferred stocks.” These stocks are attractive for venture capitalists because they give the shareholder priority for dividend payments. C-corporations can also have shareholders that are international citizens/entities.
  • Allows for corporate income splitting: Though owners of a C-corporation are subject to “double taxation,” they can also take advantage of tax codes that owners of S-corps cannot. “Income splitting” is the practice of minimizing taxes by splitting up revenue between corporate profits and personal income.

Cons of a C-corporation

  • Subject to double taxation: Profits of a C-corporation are taxed twice. Once at the corporate level and a second time as income.
  • Losses are not tax write-off’s: Losses suffered by a C-corporation cannot be written off on the business owner’s personal income tax return.

What is an S-corporation?

An S-corporation is a corporation that has limitations on its ownership structure and stock options. Unlike a C-corp, however, owners of an S-corporation are eligible for “pass-through taxation.”

Pros of an S-corporation:

  • Pass-through taxation: “Pass-through taxation” allows business owners to avoid taxes at the corporate level. It means that the IRS will treat business profits as taxable income.
  • Deduction for business income: Under recent tax code revisions, S-corporation owners can deduct up to 20% of their business income on their personal tax return.
  • Tax write-offs: Owners of S-corporations can also write off business losses on their personal tax returns.

Cons of an S-corporation:

  • Limited ownership options: One of the main drawbacks of S-corporations is the limitations placed on their ownership options. An S-corporation is only allowed 100 shareowners to hold shares in the company. Furthermore, an S-corporation cannot issue “preferred stocks” or issue stocks to non-U.S. residents.
  • Harder to form: Forming an S-corporation can also be more complicated than forming a C-corp. In addition to filing letters of incorporation, you must file a Form 2553 with the IRS and possibly submit additional paperwork to the state to be eligible for S-corporation status.

The main differences

The main differences between C- and S-corporations relate to taxation and ownership structure. The type of structure you choose will depend on your specific business needs and goals.

Regardless of what business structure you end up choosing, getting guidance from a business attorney can help ensure that you avoid legal and regulatory pitfalls at the start of your new journey.

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Moghul Law PLLC

Moghul Law PLLC 8230 Boone Blvd., Suite 210 Vienna, VA 22182 Phone: 571-732-0764 Fax: 866-451-9531 Vienna Law Office Map