Table of Contents
What is S corp vs. C corp: All About Corporations and Business Structures
A corporation can be defined as a standard or regular corporation under the operation of the Internal Revenue Service (IRS). S corporation, on the other hand, is treated as a special case in terms of tax filings and is eligible for certain tax benefits with respect to the Internal Revenue Service (IRS).
The names of both of these business structures are derived from the Internal Revenue Code from which they are taxed. Let’s further expand this. A C corporation is taxed in Subchapter C, whereas S corporations are taxed in Subchapter S. To get the status of an S corporation for gaining tax advantages, you need to file form 2553 with the Internal Revenue Service and make sure that all the corporation-related rules and regulations are met.
Common traits of S and C corporations
Following are some of the common traits:
LLC business structure
Both corporation offer limited liability protection. This provides the leverage to business owners to not being directly answerable for a firms debt and liabilities and it doesn’t matter whether it is taxed as a C corp or an S corp.
Additionally, these corporations are different legal organizations formulated by state filing.
Documents filing C corp vs. S corp
The creation of documents should be done by the state. Both S corp and C corp documents are normally called termed as articles of incorporation or Certificate of incorporation. Both of these legal entities are filed in the same way.
Type of business structure
According to the state corporation status laws, there is no difference between C Corps and S Corps in terms of compliance responsibilities. All corporations are expected to be on the same track for following the required external and internal corporation requirements. These are the bylaws, issuing stock, conducting shareholder and director meetings, hiring an agent and registered office for filing of annual data, and paying yearly fees.
Different business corporations difference: C corp vs. S corp
For small businesses assessing the S corp and C corps, the need to understand the way how both of these corporations are assessed in terms of federal income tax endeavors.
C corporations
A C corporation are taxed separately. These file corporate tax returns on the basis of form 1120 for paying taxes on the corporate stage. These corps also go the circumstances of double taxation where corporate income is disbursed to business owners in the form of allowances or dividends. This is called personal income tax. Corporate tax rate is submitted at the corporate stage than again at personal level in the form of dividends.
S corporations
S corporations are pervading tax entities. These corporations file tax returns to retain the corp status from the federal return form 1120s. However, there is no income tax disbursed at corporate level. The profit and loss statements of the business are considered as pervaded to the business owners and registered as owners personal tax returns. Furthermore any due tax is paid not on partnership basis by at separate level by the owners or shareholders.
Ownership experience
As discussed earlier, there are no differences in state corporation laws regarding S corporations and C corporations. However, the Internal Revenue Code does place prerequisites on who the shareholder is in terms of corporations to get the status of an S corporation.
S corps are normally limited to have not more than 100 shareholders and these shareholders have to be United States citizens or residents. C corp may have no limitations upon ownership.
S corporation status advantages and disadvantages
The best advantage of choosing and S corp is that these corporations do not indulge in paying of income tax at the corporate level. Therefore, the allocation of income to shareholders is only at individual level.
Furthermore, according to the Tax cuts and Jobs act of 2017, S corporation shareholders are eligible to receive deduction of up to 20% as qualified business income.
Lastly, the deprivations of an S corporation are of shareholders who can utilize these losses to counterbalance income.
In terms of the disadvantages, an S corp is not allowed to have more than 100 shareholders; this essentially means that it doesn’t go public, which can keep a cap on its potential to gain revenue from new investors.
C corporation status advantages and disadvantages
The main advantage of a C corp is the no-limit restriction on the number of shareholders it can have, according to Subchapter C. In a c corporation, anyone can possess shares, like businesses or non-US citizens. Furthermore, this type of corporation can issue stocks of multiple classes, like stocks with a proclivity to dividends and distributions. Lastly, according to the 2017 tax reform act, the corporate tax rate was lowered to a flat 21%, and the minimum tax was. This rate is lower even than the max personal tax rate, which is 37%.
One of the main disadvantage of a C corp is its paying of taxes on earnings and that the shareholders have to pay tax on dividends. This essentially means that C corp is incorporated with the phenomenon of double taxation.
Which is a better choice C corp or an S corp
The answer to this question depends mostly upon the type of business you have. For small business owners, they should definitely choose an S corporation over a C corporation. However, this is just one type; let’s discuss some scenarios where it would be wise to choose either of these corps:
Those who don’t consider an initial public offering and whose shareholder demands are not that great or any investors are not liable by the subchapter S of the IRS.
The corporation has to allocate income to shareholders.
Lastly, the scenario where issuing a preferred stock isn’t your priority.
A shareholders tax liability if taken into account of their personal income tax rate, subtractions or exemptions, this will be lowered by utilizing the concept of a pass-through association rather than a separate taxable organization.
Â
GET FREE QUOTE FOR ALL OF OUR SERVICESÂ
Black Ink will send you a free analysis of your current state and what would be the cost of managing either a separate accounting and bookkeeping services or a complete solution across New York, USA. Do get in touch and we will be happy to consult you with our bookkeeping services in NY, New York, USA.