What is the difference between an C Corporation and an S Corporation?
The simplest explanation of this would be one word. Taxes. An C Corporation (C-Corp) is a standard corporation in every sense of the word. Consult Wikipedia or your local library for definition of a corporation. Along with being a “standard” corporation comes all of the benefits of a corporation - including double taxation. An S Corporation (S-Corp) is a special type of corporation with special taxation specifications. I’ll explain both a bit here:
C corporations are taxed at both the corporate and individual level. That is, the corporation itself pays tax on business profits, and shareholders (owners included) pay additional income tax for any money they draw from the corporation, including salary, dividends, or bonuses.
S corporations elect a special tax status with the Internal Revenue Service (IRS). Rather than being treated as a separate taxable entity, the S corporation’s income is viewed like that of a partnership or sole proprietorship and is “passed-through” to the shareholders, who report the income or loss on their individual tax returns. The S corporation itself pays no income tax.
Another tax advantage of S corporations is that they can distribute money as profits rather than salary to employees who are shareholders. Profits are not subject to the Social Security and Medicare taxes that salaries are. And when you sell an S corporation, the taxable gain on the sale of the business may be less than that of a C corporation.
I’d recommend speaking with a qualified CPA (and if you don’t have a CPA, I’d recommend getting one - when it comes to business ownership, you don’t want Uncle Leo doing your taxes if he isn’t familiar with business tax codes) to assist you in figuring out which type of corporation you should be filing as. You just may be surprised at the money you can save by choosing the right one. I’ve been in business as an LLC since 2001 and this year it was to my benefit (and, oddly enough, to the IRS’s benefit as well) for me to change my filing status for my corporation. Keep up to date and always ask a lot of questions. The answers may surprise you.
