The majority of people who are looking to incorporate their business are confused as to the differences of between a C Corporation and an S Corporation. The following are some of the major differences between these two types of corporations.
A C Corporation is taxed as a separate entity and must report its profits and losses on a corporate tax return. The C Corp pays corporate taxes on its profits, while its shareholders will not be taxed on the corporation’s profits. However, if the corporation distributes its after-tax profits to shareholders as dividends, the shareholders must report the dividends on their personal income tax returns. This is referred to as a “double taxation.”
An S Corporation has to file an informational K-1 tax return but does not pay income tax. Instead, the individual shareholders, or owners, have to declare the corporation’s profits on their own personal tax returns at their own tax rate. This also prevents the “double taxation” problem of the C Corporation.
Both the C and S Corporations are allowed to provide employee benefits that are deductible by the corporation and tax-free to the employees.
S Corporations are prohibited from conducting certain kinds of businesses. Examples of some businesses that S Corporations are not allowed to engage in include:
– Insurance taxed under Subchapter L
– Domestic International Sales Corporations (DISC)
– Certain affiliated groups of corporations
All S Corporations that have inventory are required to use the accrual method of accounting. On the other hand, only C Corporations that are not considered a small corporation ($5,000,000 or less in gross receipts) are required to use the accrual method.
Every S Corporation shareholder must be a U.S. citizen or resident. C Corporations may have multiple classes of stock while S Corporations are limited to one class of stock.
We Can Help
We recommend that you discuss your specific situation with your attorney, accountant or tax advisor when choosing between C Corporation and S Corporation status.
For more information or to schedule an appointment with attorney Reed Aljian, please call (949) 861-2524.