Differences between “C” and “S” Corporations
Sole Proprietorships, one of the six types of business entities recognized by the U.S. government, usually grow, develop and become a Corporation. Now, under subchapter “C” of the U.S. tax code, all corporations are automatically recognized as C corporations unless business owners file for an “S” status (after all shareholders agree in writing to the S corporation election, they must make a timely filing of Form 2553 with the IRS). Taking no action, however, will mean that a corporation is and will remain a “C” corporation.
“C” corp and “S” corporations are types of corporate business entities, their difference is based primarily on ownership and how they pay taxes. With regard to ownership, number of shareholders in an “S” corporation cannot be more than 100, and all of whom must be U.S. citizens or residents. A “C” corporation, on the other hand, can have an unlimited number of shareholders who may also be non-U.S. citizens or non-residents.
On the issue of taxation, “S” corporations are pass-through tax entities, thus, no tax is paid at the corporate level since corporate profits and losses are reported on the tax return of shareholders. Under the “C” corp status,corporate profits are taxed at the corporate level – a case of double taxation, actually. This is because, as C corporations pay taxes, the amount of which is based on its corporate income, this same income, which is distributed to shareholders as dividends, is also the basis of the amount of personal income tax shareholders will be required to pay.
While the pass-through taxation enjoyed under the “S” corp status will definitely mean huge savings for shareholders, many corporations still choose the “C” corp status due to the absence of restrictions, such as having multiple classes of stocks, which is imposed on the S corp status.
Underlying the differences in taxation and membership, is the limited liability protection enjoyed by shareholders in both “C” and “S” corporations. Due to this limited liability, shareholders are, therefore, not held personally responsible for corporate debts and liabilities.
The law firm Russo, Russo & Slania believes that businesses should be given the all the legal assistance they need to make their business grow and flourish and which will help them avoid whatever critical errors could affect and hinder their success.