S Corporation vs. C Corporation: What is the Difference?

13 Jun S Corporation vs. C Corporation: What is the Difference?

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Business Tips

by Becky Brown  •  0 Comments

s-corporation-vs-c-corporation-what-is-the-difference.jpgThe initial process of starting a business as a sole proprietor, partnership or limited liability company (LLC) can be relatively simple. However, as a business grows there are more issues to consider and more options available. The structure of a business can have a major impact on the liability of the owners, the amount of money paid out in taxes, and the speed at which the company can grow, among other things. S-corporations and C-corporations are both options for business owners who are considering restructuring their business for any variety of reasons.

C-corps and S-corps have several similarities. Both types of corporations give the owners and shareholders the protection of limited liability. In addition, c-corps and s-corps both have to file articles of incorporation and have the ability to issue shares of stock to investors. The similarities of C-corporations and S-corporations are important, but for a business owner who is considering incorporating, it is essential to understand the differences in order to make an informed decision.

Taxation

Taxation is a complicated issue at any level of business, but it can be especially complicated on a corporate level. Taxation is one of the main areas where S-corps and C-corps differ. A C-corporation is taxed at two levels, first on the corporate level and then on the personal level - when dividends are disbursed to the shareholders. S-corporations, however, are only taxed at the shareholder level and not the corporate level. The difference in taxation is an important factor to consider when deciding between a C-corps and S-corps because it can have a major impact on the bottom line for shareholders. There are different ways to structure the pay of shareholders that can further impact the taxation. It is important to consult a tax professional to fully understand the tax implications of choosing an S-corporation or a C-corporation.

Growth Potential

Another major difference between S-corps and C-corps is the growth potential. S-corporations can only have up to one hundred shareholders. If the shareholders grow beyond the one hundred mark for a certain period of time, the corporation may have to restructure. There is no limit to the number of shareholders for a C-corporation, which translates into unlimited growth potential. C-corporations have the freedom to add more investors whenever additional capital is needed for growth. However, once a C-corporation reaches a certain size it is required by federal guidelines to be registered with the Securities and Exchange Commission.

Types of Owners

The growth potential for a business increases drastically when there is the option of bringing in investors as shareholders. In addition, the type of shareholders available can impact the growth level of a corporation. C-corporations and S-corporations both have shareholders, but the types of shareholders allowed are different for the two types of corporations. There are no restrictions on the type of entities that can own shares of a C-corp. For example, an individual or another corporation can own shares of a C-corp. Shares of an S-corp have more restrictions related to the types of shareholders. Other corporations, Limited Liability Companies, and partnerships are not eligible to own shares in an S-corp.

 

Topics: Business Tips