C corporation and S corporation are both tax classifications that offer limited liability to the owners and stakeholders of a company. But the specific differences between the two might make one better for you than the other. Highlighting the differences and listing the benefits of each, this article helps you decide which to choose.
C -Corp
C corporations are legal entities that are separate from their owners and stakeholders. A C corporation is a separate taxpayer, and all tax elements such as income and expenses are taxed at the corporation rather than from the owners.
But, when the profits are distributed to the owners and stakeholders, they have to pay an income tax. There’s no “flow-through” between the corporation and the owners. This results in what’s called double taxation, which is the primary disadvantage of having a c-corporation.
Example
Say your C corporation earns gross profits of $100,000. For simplicity, let’s assume that there are no operating costs or retained earnings, and all the profits go to the stakeholders.
First, there’ll be a 30% tax deduction at the corporation, leaving $70,000 in net income. But when this amount is distributed to the stakeholders, there’ll be another 28% income tax deduction, leaving $50,400 of personal income.
Benefits of a C Corp
• Limited liability
• No limit to the number of stakeholders
• Unlimited ability to sell equity to raise capital
Drawbacks of a C Corp
• Double taxation
• More expensive than a sole-ownership, partnership, LLC, or S corporation
• More regulations on the company as a legally independent entity
• Stakeholders can’t report corporate losses on personal tax returns forms
S Corp
An S corporation is not a legal entity completely separate from the owners and stakeholders. Unlike a C corporation, an S corporation is a flow-through entity, which means that the company’s profits belong to the owners and stakeholders.
The profits of an S corporation are only taxed at the corporation, and the owners and stakeholders don’t have to pay an income tax when distributing the income.
Example
This time, let’s assume that your S corporation makes gross profits of $100,000. Let’s again assume that all of this goes to the stakeholders.
Again, there will be a 30% tax deduction leaving $70,000. But the entirety of this amount can be distributed to the stakeholders with no additional income tax deductions.
Benefits of an S Corp
• Limited liability
• Owners and stakeholders enjoy a flow-through status
• Single taxation, higher personal incomes
• Ability to raise capital by selling shares
• Once a year tax filing instead of quarterly tax filing in a C corporation.
Drawbacks of a C Corp
• There can’t be more than 100 stakeholders
• Flow-through status for tens of stakeholders results in a logistic nightmare
• You must be a US citizen to create an S corporation
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