The U.S. Internal Revenue Service (IRS) recognizes several types of business entities. In addition to sole proprietorships and limited liability companies (LLCs), there are S corps and C corps. You can structure your business as either an S corp or C corp. While they are both corporation-based entities, though, they aren’t the same. What is an S corp and C corp exactly, and how do these entities differ?
What Is an S Corp?
An S corp is a corporation-based entity that passes its income to its shareholders. All corporation-based entities have shareholders. Whether you want to start an S corp or C corp, you’ll have to jump through the hoops of issuing stock and holding shareholder meetings. You don’t have to necessarily list your business on the stock market. Rather, you just need to have shareholders — even if your business is privately traded. S corps are pass-through entities, meaning shareholders are responsible for paying taxes on their business’s gains or losses.
What Is a C Corp?
A C corp is a corporation-based entity that doesn’t pass its income to its shareholders. C corps still have shareholders, and they must perform many of the same stock-related tasks as their S corp counterparts. But C corps themselves must pay taxes. C corps aren’t pass-through entities. Their shareholders must pay taxes on dividends, and the C corps themselves must pay taxes on their income.
Differences Between S Corps and C Corps
The main difference between S corps and C corps is that the former is a pass-through entity, whereas the latter is not. S corps are classified as pass-through entities because their taxes are passed down to their shareholders. C corps use a different form of taxation known as double taxation. With double taxation, both the shareholders and the C corps themselves pay taxes.
Another difference between S corps and C corps involves stock. S corps only have a single class of stock. C corps, in comparison, support multiple types of stock. If you operate a C corp, you can create different classes of stock with different levels of voting rights for shareholders.
S corps are more common than C corps among small businesses. Only businesses with more than 100 shareholders are eligible for the C corp status. S corps, in comparison, are limited to 100 shareholders. Since small businesses typically have fewer shareholders, most of them operate as an S corp, instead.
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