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The differences between S corporations and C corporations

On Behalf of | Apr 27, 2022 | Business Formation & Planning

There are many decisions to make when starting up a business and business forms to choose from when it comes time to make that important decision. In some cases, it makes sense to register a business as a corporation. There are multiple types of corporations, and two of the most common for new businesses are known as S corporations and C corporations.

Tax benefits

One of the primary differences between all of the business forms is their tax treatment. For instance, in a sole proprietorship, the business is taxed through the owner’s personal taxes. A limited liability company format, or LLC, provides some separation between the business’ tax liability and that of the individual owners. Corporations can provide stronger protection, but the type of protection depends on the type of corporation.

In a C corporation the income of the corporation is first taxed and then shareholders are also taxed for dividends or stock sales. S corporations are taxed differently. S corporations enjoy pass-through taxation like a sole proprietorship or partnership. The corporation is not taxed at the corporate level but shareholders are. The trade off is that there are shareholder limits for S corporations that do not apply to C corporations.

One of the primary limits to be aware of is that S corporations are limited to 100 shareholders, which may not be a good business form to select for a business wishing to go public at some point. There are other limits as well. Selecting a business form may seem simple but it impacts the start up process of the business, as well as its potential growth down the road, which is why trained guidance through the process of setting up a business can be helpful.

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