S-Corp vs C-Corp: What Are the Advantages for My Business?

s-corp vs c-corp differences incorporating business best corporate tax status

Did you know there are over 30 million small businesses in the United States? If you are in the process of starting your own small businesses and are confused about s-corp vs c-corp, we are here to help you choose the right corporate structure.

Keep reading to learn the difference and similarities between an s-corporation and a c-corporation business entity.


What Is an S-Corp?

An s-corporation is a corporation that has a special tax status with the Internal Revenue Service (IRS). This gives S-corps certain tax advantages over a C-corp because the income distribution among the shareholders or owners is only taxed at the individual level vs the corporate-level income tax bracket.

If you choose to incorporate an S-corp you will also have to fill out Form 2553 and file it with the IRS. You also have to make sure that all S corporation guidelines are met when you file during the incorporating process. 


What Is a C-Corp?

This is the default or standard corporation under IRS rules. This is where the owners or the shareholders of the company are taxed separately from the entity. These businesses are also subject to corporate income taxation. 

The main thing to keep in mind is that legally the owners are separated from the income from the corporation.


S-Corp vs C-Corp Differences

Now, let's go over the main differences between c-corp vs s-corp. C corporations are separately taxable entities. These corporations file a Form 1120 which is a corporate tax return and they also pay taxes at a corporate level. A c-corp might end up having a double taxation if the corporate income is distributed to the owners as dividends because this would be considered a personal taxable income. 

An s-corp, on the other hand, is considered a pass-through taxation entity. This means that this type of business will file a Form 1120S which is an informational federal return. With an s-corp, the losses or profits from the business are "passed-through" to the business and then reported on the owner's personal tax returns. 

If you opt for an s corp you are limited to no more than 100 shareholders and every shareholder is required to be a United States citizen or a United States resident. Also, s corporations can't be owned by C corporations, LLCs, trusts, partnerships, or other S corporations (there are certain exceptions).

Another difference is that S-corporations are only allowed to have one class of stock but C-corporations can have multiple classes. 


Feeling Like a Pro on Incorporating?

Now that you know more about s-corp vs c-corp you can make an informed decision on which is the best option for your business. There is no right or wrong choice, the key is to choose what best fits your business needs. The decision will also come down to how you want the corporation treated for federal income tax purposes. 

Did you learn something new today about S-corp vs C-corp business entities? Please check back often to never miss our latest business posts and always stay in the know. Visit the Finance section of the Bootstrap Business Blog for more information about incorporating your business and company financial management.

Bootstrap Business Blog Newest Posts From Mike Schiemer, Partners, & Blog Outreach Services