S-Corp VS C-Corp
As a small business owner, you’re going to need to understand business structures, even if you’re registered as an LLC and not a Corporation.
So: S-Corp VS C-Corp. Which do you choose? What is the difference? What about Inc. VS S-Corp?
If you don’t understand these terms and need help understanding the differences between the different structures, we’re here to help! Keep reading to learn more.
Table of Contents
S-Corp VS C-Corp: The Key Differences
S-Corps are smaller than C-Corps. They’re taxed differently, can take advantage of different stock options, and handle their owners and shareholders differently.
Here’s a quick breakdown of the differences between S-Corps and C-Corps:
1. Differences In Taxation
- C-Corp: Profits are taxed twice, first through income taxes and then when shareholders receive their dividends
- S-Corp: Profits are taxed only once through corporate income taxes at the shareholder level
The only way to avoid double-taxation if you are a C-Corp is to operate at a loss or reinvest profits back into the company. Under new tax regulations, C-Corps pay a flat 21% federal tax. Owners of S-Corps, however, can claim a 20% business deduction from their personal returns.
Note: Talk to a tax specialist about how these differences in taxation could affect your business. And then compare to other business structures like a sole-proprietorship or LLC, which also operate as pass-through entities.
2. Differences With Venture Capital
- C-Corp: Stock options offered to shareholders are unlimited, which is best for growing companies.
- S-Corp: Stock options offered to shareholders are limited to one class of stock, which makes it harder to raise venture capital.
3. Differences With Owners & Shareholders
- C-Corp: Unlimited shareholders that don’t have to be US Citizens.
- S-Corp: Up to 100 shareholders and all (plus any owners) must be US Citizens.
These differences really come down to growth. With these restrictions, it is difficult for an S-Corp to look appealing to investors and venture capitalists, and it’s especially limiting to any business interested in growing outside of the United States.
Which Is Right For Your Business?
Here are some good guidelines if you’re still stuck.
A C-Corp would be good for your company if…
- You don’t want the time/hassle of updating S-Corp paperwork requirements.
- You want room to grow/expand ownership and stock options.
- Your company makes a significant number of charitable donations.
- You are making a profit and might want to shelter those profits.
An S-Corp would be good for your company if…
- You are fine with limited ownership options. (US Citizens only, fewer than 100 shareholders)
- You have no need for expanded stock options.
- You have an excellent accountant (an audit is likely: there are specific requirements needed to maintain status and S-Corps face higher scrutiny).
- You are just starting out and might still be losing money.
S-Corp VS C-Corp Next Steps
Size and tax structure are the two main differences between S-Corps and C-Corps. Once you’ve decided there is a benefit to incorporating, there will be paperwork and hoops to jump through in order to begin paying corporate tax rates and earning stock options.