Named for the respective parts of the Internal Revenue Code that they are taxed under, C corporations and S corporations have similarities and both can be solid choices for business incorporation. While they may share some important similarities, they also have important differences. Prior to selecting a C corporation versus an S corporation, it can be important to both understand and weigh the differences and varying features each brings to the table.
What Is an S Corporation versus a C Corporation?
Pursuant to IRS rules, the C corporation is the standard corporation. It is the default corporation unless a corporation elects special tax status with the IRS and opts to form an S corporation. As previously stated, a C corporation is named so as it is taxed under Subchapter C of the Internal Revenue code. An S corporation is named so as it is taxed under Subchapter S of the Internal Revenue Code.
As corporations, both a C corporation and an S corporation must have certain things inherent to the corporate structure. Dividends, profits of the corporation, go to shareholders in amounts proportional to the number of shares held. Directors are tasked with managing the corporation’s everyday operations. Stocks are issued. Bylaws are adopted. An annual director’s meeting, as well as an annual shareholder’s meeting, is held and minutes of such meetings are to be retained. All corporations must file annual reports with the state government. Annual fees must be paid. Failure to comply with these things risk the loss of liability protection and threaten the corporation with potential dissolution.
The central difference between a C corporation and an S corporation goes back to their names. They are named for different sections of the Internal Revenue Code. They are taxed in different ways for federal income tax purposes. C corporations are taxed as separate entities. A C corporation filed Form 1120 for its corporate tax return. Taxes are paid at the corporate level and there is the potential for double taxation. Double taxation can occur if the business owners have received dividends from corporate income. These distributions are considered to be personal taxable income. This means that taxation of corporate income would really occur on both the corporate level and the individual level when dividends are paid out.
S corporations, on the other hand, provide a pass-through for taxes. While S corporations file an informational federal return, the corporation does not pay income tax. Instead, both the profits and losses of the corporation are passed through the business and go on the personal tax returns of the owners. This means an S corporation is handled similarly to that of a sole proprietorship or a partnership. The profits and losses of the business are passed through and only taxed to the shareholders. Shareholders report them on personal tax returns.
Pittsburgh Business Law Attorney
While there may be similarities, the pivotal differences between a C corporation and an S corporation can have a profound impact on your business. To make sure you are making sound business choices that will help ensure your business success far into the future, talk to the knowledgeable business law attorneys at Jones, Gregg, Creehan & Gerace about your options for recovering compensation. Contact us today.