When starting a new business, you might be wondering whether to use a C-corp or S-corp classification. The Internal Revenue Service (IRS) recognizes several different tax classifications for businesses, some of which include sole proprietorships, limited liability companies (LLCs), C-corps and S-corps. While C-corps and S-corps are both “corporations,” however, they aren’t the same. What’s the difference between C-corps and S-corps exactly?
S-corps are more common with small businesses. This is because they are limited to no more than 100 shareholders. Both S-corps and C-corps distribute shares to their respective owners, but S-corps can only have up to 100 owners. C-corps, on the other hand, can have an unlimited number of shareholders.
Types of Shareholders
There are nuances regarding the types of shareholders supported by S-corps and C-corps. S-corp can only have certain types of shareholders, such as individuals, trusts, exempt organizations and estates. C-corps, in comparison, can have all types of shareholders.
Another difference between C-corps and Corps is pass-through taxation. S-corps are classified as pass-through entities, meaning that all of their profits and losses are passed through to their owners. The owners must then pay the taxes on the S-corp’s profits. C-corps are not pass-through entities. Instead, they are classified as separate entities. C-corps must pay taxes on their profits, and their shareholders must pay taxes on any dividends they receive from the C-corp.
It’s also worth mentioning that governance is easier with S-corps than with C-corps. They have less-stringent requirements for record-keeping, and their decision-making formalities are more relaxed. C-corps, in comparison, have more stringent requirements for decision-making, and they have stricter rules for decision-making.
Many entrepreneurs assume that S-corps and C-corps are the same. After all, they are both “corporations,” and both of these tax classifications can protect owners’ personal assets from business-related liabilities. As revealed here, though, there are several key differences between S-corps and C-corps. Which tax classification should you choose?
S-corps are generally preferred by small businesses that want to avoid double taxation and take advantage of the simpler governance structure, while C-corps are preferred by larger businesses with multiple owners and more complex operations. Keep in mind that the type of corporation to form depends on the specific circumstances of each business and its owners. For some businesses, an S-corp is the right choice. For others, a C-corp is the right choice.
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