Similarities and Differences
By Heather Huston, Assistant Service Manager, BizFilings
Trying to decide between a C corporation vs. an S corporation? When starting a business or changing your business structure, this is one of the most common questions business owners ask. To answer that question you have to know the differences between the S corp and the C corp, as well as the pros and cons of an S corp and the pros and cons of a C corp. The choice really depends on your business goals.
This article will cover:
The C corporation is the standard (or default) corporation under IRS rules. The S corporation is a corporation that has elected a special tax status with the IRS and therefore has some tax advantages.
Both business structures get their names from the parts of the Internal Revenue Code that they are taxed under. C corporations are taxed under Subchapter C while S corporations are taxed under Subchapter S. To elect S corporation status when forming a corporation, Form 2553 must be filed with the IRS and all S corporation guidelines met.
Here are some of the qualities shared by both C corporations and S corporations:
For small business owners evaluating S corporations vs. C corporations, the decision usually comes down to how they want the corporation to be treated for federal income tax purposes.
As we mentioned, state corporation laws make no distinction between S corporations and C corporations. But the Internal Revenue Code does place several restrictions on who can be shareholders in order for the corporation to qualify to be an S corp.
There is no one size fits all answer to when a small business owner should choose an S corporation over a C corporation. It depends upon each individual situation. But the pros may outweigh cons when one or more of the following applies:
Again, there is no one right answer to that question, but here are some situations where a C corp may be a good option:
Actually, you don’t “become” or “form” a C corporation or an S corporation. You form a corporation—period. And you do that by filing a document, generally referred to as Articles of Incorporation (sometimes called a Certificate of Incorporation) with the state and pay filing fees.
Before you do, you have to choose a name (after first determining that it is available to you) and choose your corporation’s registered agent. Both the name of the corporation and the registered agent have to be included in the Articles of Incorporation.
After the incorporation process is completed, you will need to fulfill other requirements. These include adopting bylaws, holding an initial meeting of directors and shareholders, and issuing shares of stock to owners. Your corporation will be taxed under Subchapter C unless you qualify for, and elect to be taxed under Subchapter S.
After you first become a corporation by filing your Articles of Incorporation with the state, you will need to file Form 2553 with the IRS if you wish your corporation to be taxed under Subchapter S. The IRS instructions—which can be a bit tough to follow—require that an election is considered effective in the current tax year only if the Form 2553 is completed and filed -
Generally, an election made after the 15th day of the 3rd month but before the end of the tax year is effective for the next tax year (unless you can show
Keep in mind that some states also require you to file a state-level S corporation election after incorporating your business.
When you first incorporated your business, you had to choose whether your corporation would be taxed as a C corp or an S corp.
But what if you change your mind later? This can happen, for example, because your business goals changed. Say you weren’t originally interested in an IPO but now you are. Or the tax laws changed, resulting in your corporation being better off taxed differently than before.
A lot of small businesses were reevaluating whether they should change from S corporation tax status to C corporation tax status, or vice versa, when The Tax Cuts and Jobs Act of 2017 was passed. This law made significant changes including—as noted earlier—reducing the corporation tax rate (which favored C corporations) and providing a special 20% deduction for pass-through entities (which favored S corporations that qualified for it). (The reduced tax rate was just one of many changes enacted.)
Tax laws are complex. And consulting with tax advisors will help you make the best decision as to how your corporation should be taxed, both at the time of incorporation and on an ongoing basis.
Your choice of entity type has a big impact on many aspects of your business, ranging from taxes to financing to growth strategies. Looking at the advantages and disadvantages of your options may help you come to a decision that best suits your unique business needs and goals.
To help you decide which corporate entity type might be best for you, try our Incorporation Wizard. This tool allows you to compare different business types by key considerations such as industry, income, future plans, and more.
Start your business with confidence. We offer various incorporation packages to get your business up and running. Starting from $99 and includes 6 months FREE Registered Agent services.