Do you need to know about the difference between a “C” corporation and a “S” corporation?
See also – “What is a corporation?”
Once you’ve decided to form a corporation, your next decision is whether to elect as a “C” corporation or an “S” corporation.
These two types of corporations get their names from the part of the Internal Revenue code they’re taxed under.
C Corporations: (subchapter C of the internal revenue code)
- A C corporation is taxed as an entity at the corporate level.
- Additionally, each owner is taxed on gains at the individual level
- This is referred to as “double taxation” since both the corporation and the individual shareholder are taxed.
- Double taxation is often seen as a disadvantage of C corporations.
Advantages of C corporations include:
- no limit to the total number of shareholders a C Corporation can have
- no restrictions on who can own shares
- including foreign entities.
S Corporations: (subchapter S of the internal revenue code)
- S corporations don’t pay corporate income tax
- So they aren’t subject to double taxation.
- Instead, they operate as “pass-through” or “flow through” businesses.
- business profits and losses pass through to individual owners who pay tax on this along with their other income.
Most businesses in the US operate as S Corporations because of this tax advantage.
Potential disadvantages of S corporations include:
- an S corporation can have no more than 100 shareholders
- owners must be United States citizens or permanent residents (with several exceptions)
Which Type of Corporation Should You Choose?
C corporations are more commonly used for higher income individuals while S corporations are typically used for smaller businesses.
It’s important to consider both the personal liability and tax implications involved when deciding whether a C-corporation or S-corporation is right for your business.
How to Decide:
If you need help deciding whether to form as a Sole Proprietor, S Corp, C Corp or LLC please get in touch. We can help you make the right strategic decision.
We specialize in the business laws of Alaska and Montana and are here to help with your business formation and compliance needs.