C Corp or S Corp—Which Structure Is Right For Your Business?

What are the similarities between a C corporation and an S corporation?

C corporations and S corporations have several things in common. First, both structures require that articles of incorporation be filed with the state where the corporation wishes to be formed. Both structures generally have shareholders, directors, and officers. Additionally, both structures represent entities that are separate from their owners, providing limited liability protection that shields shareholders from personal responsibility for the business’ debts.

What are the differences between a C corporation and an S corporation?

The main differences between these two structures are how they are taxed, structure ownership, and issue stock.

What are the advantages of a C corp?

C corporations are the preferred structure for businesses that want to attract large numbers of investors. Unlike S corps, C corps can have an unlimited number of shareholders. C corp shareholders can be individuals or businesses, and they may be based in the U.S. or abroad. C corps can also issue various classes of shares, allowing them to entice investors with preferred guaranteed dividends. Some C corps are even eligible to issue qualified small business stock, which can confer substantial tax advantages to early investors. Finally, a C corp is the better structure for retaining profits within the company. As a result of these benefits, the C corp structure can give a business much greater capacity for raising capital and using it to fuel growth.

What are the drawbacks of a C corp?

The main drawback of a C corp structure is double taxation. A C corp pays taxes on the corporate level, and then if it pays dividends, these amounts are also taxable as personal income for shareholders. Additionally, a C corp requires more complex administration and more extensive filing requirements than an S corp. For these reasons, it’s important to understand the concrete benefits your business expects to get from a C corp structure before organizing it in this way.

What are the advantages of an S corp?

An S corporation avoids the double taxation problem that C corps often encounter. This is because an S corp is a pass-through entity. Instead of paying corporate income tax, the company files an informational corporate return. The income reported is then attributed to its shareholders and taxed as their personal income. S corps also enjoy simpler administration and filing requirements, which can help businesses that seek to minimize overhead costs.

What are the drawbacks of an S corp?

S corporations are more limited in their ability to attract a wide variety of shareholders due to strict criteria: a maximum of 100 shareholders, all of whom must be U.S. residents. Additionally, it can be more difficult to retain profits in an S corp, since those profits are reportable on shareholders’ personal tax returns regardless of whether or not they take distributions from the company.

Choosing your business structure

While it’s possible to convert a business from an S corp to a C corp or vice versa, you may be able to limit costs and expand your company’s potential by choosing the most appropriate structure at the outset. Because the tax code is complex and undergoes frequent changes, it’s important to consult with an experienced business tax professional when determining which business structure would provide the greatest advantages.

Stable Rock is a full-service tax and accounting firm that provides startup entrepreneurs the financial guidance they need to create scalable growth. With a focus on personalized service, we can help you choose the corporate structure that best sets your business up for success.