What is the difference between C Corp and S Corp?
There are two types of corporations you can set up in the United States – a C Corp and an S Corp. Both have significance for business owners, especially if there are shareholders in the business who share in the profits. Usually a business is set up as a C Corp and can become an S Corp at any time – usually when it applies for special tax treatment from the Internal Revenue Service. A business can also remain as a C Corp for any length of time.
About C Corp
C Corp is used to describe the organization of a business and the manner in which it is formed. “C” is for taxation purposes only and describes the level of liability of the partners with regard to the debts that the business incurs. Most businesses are C Corp when they are first established.
C Corp businesses are taxed on the profits of the business, but there are differences in the rate of tax. A business that has a profit of less than $50,000, it is taxed at the rate of 15%. A business whose profit is between $10 M and $15 M, the tax rate increases to 35%. Employees of the business are also taxed. Income tax is deducted from their pay and the rest of the salary is not subject to tax. In a C Corp business partners are not liable for any loss in the business, unless one of them has engaged in some form or corporate criminal activity.
About S Corp
When a business owner attempts to limit the level of liability, he can switch the business from a C Corp to an S Corp. In this way the personal property of the owner is safe if the business should fail and he has to file for bankruptcy. In this type of business, the owners are required to file personal income tax returns in additional to one for the business. It is important that when you decide to change a C Corp to an S Corp that you seek legal representation because in some of the states an S Corp does not receive any preferential treatment.
Other differences between C Corp and S Corp
While the major difference between a C Corp and an S Corp is in the way they are taxed, there are also other differences that you should be aware of.
- An S Corp has restrictions on its business activity. For example, it is not permitted to engage in banking or insurance and some types of affiliated companies.
- C Corp is better for a large corporation because S Corp is not suited for this type of business.
- A C Corp can choose the beginning and end dates of its annual activity, but an S Corp has to follow the calendar year.
- A C Corp can have different types of stock, but an S Corp is limited to its own class of stock.
Similarities between C Corp and S Corp
- Both are legal entities and are treated the same as individuals under the tax laws of the US.
- There are no time limits on how long a business has to remain as a C Corp or an S Corp. If the owners die, they do not have to change.
- There are shareholders in both.
- Stocks can be sold in both to raise monies
Anyone that is considering starting a new business should seek legal advice to determine which of these would be best one for your needs.