S Corp Vs C Corp – differences between C Corp and S Corp

The comparison of S Corp vs C Corp; differences, similarities, as well as the advantages and disadvantages of S Corp and C Corp. The major difference between C Corp and S Corp is that the shareholders in an S Corp are never at risk of being personally liable for the company’s debts.

What is S Corp?

An S Corp stands for S Corporation and it is a type of corporation which has filed to be treated as an “S Corporation.” This means that it will not pay federal corporate income tax on its net income if it distributes all of its profits as dividends. The amount distributed as a dividend must then be included in the personal income tax returns of the shareholders and taxed according to their personal tax rate. There are no restrictions on who can buy shares in an S Corporation.

What is C Corp?

C Corp stands for C Corporation and it is an entity that is separate from its owner(s) and as such offers legal protection from liability against claims of creditors. The corporation is responsible for its own debts and may offer its shares or equity to the public.

As a legal entity, corporations have many of the same rights as actual persons in law but are restricted in some ways. For example, they cannot vote in political elections nor file class-action lawsuits unless the C Corporation has explicitly enabled it by filing for such status.

S Corp vs C Corp Pros and Cons

There are several types of corporations in the United States. These include Sole proprietorships, C corps, S corps and LLCs; but we will outline some of the disadvantages and advantages of S corps and C corporations.

S Corp Benefits and Cons

This type of company is advantageous because it avoids double taxation (both at the entity and shareholder levels). The company does not pay taxes. Instead, the income “flows” through to individuals who report it on their personal tax returns.

The biggest disadvantage to an S corp is that it cannot provide fringe benefits such as health insurance and life insurance. This can be a problem because some employees may prefer these benefits. Furthermore, under current law, there is no way for shareholders of an S corp to take advantage of the lower tax rates that sole proprietors pay on their business income.

The Pros and Cons of a C Corp

A C-corp is the regular type of corporation that most people work for. It has many shareholders (sometimes more than 100) who are not all U.S citizens or residents. It also has several classes of stock shares in addition to one class of voting stock). The company pays taxes before distributing dividends to shareholders, but double taxation does not occur when the dividends are distributed because shareholders report their share of the company’s profits (and pay taxes on it) on their personal tax returns.

Because a C corp can provide more benefits and has less stringent filing requirements, it is often better for companies that expect to grow quickly. Many organizations such as government departments and universities use this type of corporation.

However, it is also more difficult to manage than an S corp because there is no way to “flow” income through to individuals who will report it on their personal tax returns.

Furthermore, there is generally no limit on how much money shareholders can lose in a C corp if the company fails and goes bankrupt. This could be a problem for you if you own shares of stock and want some guarantees regarding what your losses will be.

S corp vs C corp tax advantages

The C corp tax advantage is the fact that its members only pay tax on their income unless they are also employees in the same C corp; in this case, they have to pay another tax on the income earned as an employee. For S corp, its tax advantage is that the company doesn’t pay tax, instead, the owners report the company’s revenue as personal income; the benefit of this is that the money reinvested into the company again would not be taxed; only the money paid to owners as income would be taxed.

Fringe benefits of C corp vs S corp

The biggest disadvantage to an S corp is that it cannot provide fringe benefits such as health insurance and life insurance. This can be a problem because some employees may prefer these benefits. Furthermore, under current law, there is no way for shareholders of an S corp to take advantage of the lower tax rates that sole proprietors pay on their business income.

Similarities and Differences between C Corp and S Corp

Difference between C Corp and S Corp - Infographic showing the comparison between S Corp vs C Corp
Difference between C Corp and S Corp – Infographic showing the comparison between S Corp vs C Corp.

Differences Between C Corp and S Corp

  1. As legal entities, corporations have many of the same rights as actual persons in law, but are restricted in some ways. For example, they cannot file class-action lawsuits unless the C Corporation has explicitly enabled it by filing for such status.
  2. An S Corporation, on the other hand, is a corporation which has filed to be treated as an “S Corporation.” In general this means that it will not pay federal corporate income tax on its net income if it distributes all of its profits as dividends. The amount distributed as a dividend must then be included in the personal income tax returns of the shareholders and taxed according to their personal tax rate. There are no restrictions on who can buy shares in an S Corporation.
  3. C Corp pays taxes on its own earnings while an S Corp’s earnings flow directly to shareholders and are taxed at their individual rates.
  4. S Corp shareholders are able to contribute more money to their retirement accounts than C Corp shareholders.
  5. The pass-through taxation of the S Corp structure puts it at an immediate tax disadvantage to the C Corp.
  6. The owners of a successful S Corp will pay more personal income taxes early in their company’s life than they would as part of a C Corp. They will also avoid higher taxation later in the company’s lifespan if it has losses which can be used to offset their other income in that year.
  7. Shareholders in a C Corp receive no tax deduction for corporate losses and are taxed even if the corporation is in a loss position.
  8. Another major difference between C Corp and S Corp is that shareholders in an S Corp are never at risk of being personally liable for the company’s debts. This means that they are more likely to invest in their business because it cannot fail due to external circumstances. A shareholder in a C Corp, on the other hand, is liable for any debt of the company that they have guaranteed or that is due to them personally. This can be a major consideration for those shareholders who may not have any other assets and therefore would not be able to pay back loans to the corporation if they became due.
  9. S Corps are less expensive to maintain than C Corps. This is because they do not need to hold annual shareholder and director meetings or file annual reports with the state (although some states require an annual report).
  10. S Corp shareholders who work for the company must receive a “reasonable” salary. This is defined as at least the federal minimum wage, but the amount could be higher depending on state laws. Reasonable compensation limits the tax benefits, but also protects the company from personal liability should lawsuits arise.
  11. C Corp shareholders who are not full-time employees do not need to be paid a salary, but their dividends are currently taxed as personal income. This means that distributions of dividends to shareholders are not deductible as a business expense for the company. The rules regarding reasonable salary payments can put an S Corp at a disadvantage if it has shareholders who are also employees.
  12. Shareholders in a C Corp can take out loans from their company without any limitations. This enables them to use the corporation’s money for personal expenses and are tax-free. A C-Corp shareholder can also take out a loan from the corporation and be repaid at any time. This would allow them to leave their money in the company and avoid taxation on dividends.
  13. S Corp shareholders can never take loans from their corporation without severe tax penalties that negate the benefit. The corporation must also charge them interest on these loans.
  14. S Corp shareholders are limited in how much they can take out of their business as compensation. They can take out a salary that is deemed reasonable by tax authorities for the work they do, based on the national minimum wage or other state-mandated minimum. They can also take out dividends, but these are taxed as personal income at their regular tax rate. The only money they can take out of their company and not be taxed is money that was left in the company as undistributed earnings after they took their salary and dividends.
  15. This is a major perk for shareholders in an S Corp who do not actively work for the company because it means that they have a way to move money out of their corporate account and into an individual bank account without being taxed.
  16. C Corp shareholders may find it more advantageous to use their company as a cash engine because they can take out loans and be repaid any time, tax free. Loans from a corporation are not required to be repaid if the shareholder leaves the company. The loan repayment is treated as a dividend payment and therefore is not taxable if the shareholder leaves.

Table showing the Differences Between C Corp and S Corp

C Corp
S Corp
Liability
A shareholder in a C Corp is liable for any debt of the company that they have guaranteed or that is due to them personally.
Shareholders in an S Corp are never at risk of being personally liable for the company’s debts
Taxes
C Corp pays taxes on its own earnings
An S Corp’s earnings flow directly to shareholders and are taxed at their individual rates.
Retirement Account
Shareholders contribute less money to their retirement accounts than S Corp shareholders.
S Corp shareholders are able to contribute more money to their retirement accounts than C Corp shareholders.
Tax Deductions
Shareholders in a C Corp receive no tax deduction for corporate losses and are taxed even if the corporation is in a loss position.
Shareholders in an S Corp can receive tax deductions for corporate losses and are not taxed when the corporation is in a loss position.
Cost
C Corps may be expensive to maintain because they hold annual shareholder and director meetings and also file annual reports with the state.
S Corps are less expensive to maintain than C Corps. This is because they do not need to hold annual shareholder and director meetings or file annual reports with the state (although some states require an annual report).
Number of shareholders
There is no limit to the number of shareholders in a C Corporation.
An S corp is a special type of company that has 100 or fewer shareholders.
A table showing the difference between C Corp and S Corp

S Corp vs C Corp Similarities

  • They are both types of business corporations
  • They offer some level of liability protection
A video on the Comparison of S Corp vs C Corp

FAQs on S corp vs C corp

What is the difference between s corp vs c corp?

A major difference between C Corp and S Corp is that shareholders in an S Corp are never at risk of being personally liable for the company’s debts. This means that they are more likely to invest in their business because it cannot fail due to external circumstances.

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