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The Differences Between C Corporations and S Corporations

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You’ve decided to set your business up as a corporation, but now you find out there are C corporations and S corporations. Do you know the differences between the two so you can decide which is right for you? It’s important to point out that every company is different based on their business goals. This is why it’s important to speak with a Washington DC business law attorney when you’re in the planning stages. This will help you make an educated decision on which business organization structure is best for your company.

C Corporation vs. S Corporation

When you incorporate, the default corporation type is the traditional C corp. Becoming an S corporation is a special election done through the IRS and is subject to strict guidelines. Not everyone will be eligible for S corporation status.

Both have some similarities in the way they handle ownership, liability, capital, and governance. And, they are both corporations, just one is a separate status that applies to some variations in taxation and ownership.

Similarities Between C and S Corporations

At the end of the day, there are probably more similarities than differences when you compare the two corporation types. The following attributes are found in both S and C corporations:

  • Corporate Structure: Corporations have a specific structure that must be followed with shareholders, officers, and directors. Directors handle major decisions and elect officers who handle the day-to-day operations. Shareholders are the owners who elect the board of directors.
  • Liability: In general, shareholders are not personally liable for the company’s debts and liabilities. However, there are certain circumstances that can open the door for personal liability if the corporation doesn’t operate in compliance with regulations.
  • Compliance: Both corporation types are expected to file certain documents with their governing state, like the Articles of Incorporation. There are other similar activities like stock issuance, enacting bylaws, holding director and shareholder meetings, and more.

Differences Between S and C Corporations

The biggest differences between a traditional C corporation and an S corporation revolve around ownership and taxation:

  • Ownership: C corporations have no cap on the number of allowed shareholders, whereas S corporations are capped at 100, and all of them must be US citizens. S corporations cannot have other corporations, LLCs, or trusts as shareholders whereas C corporations can. S corporations are also limited to the type of shareholders they have. C corporations can have different levels of shareholders where votes can count with different weighting. S corporations are restricted to one type of stock only.
  • Taxation: For both corporation types, shareholders pay personal income tax on dividends and from salaries drawn from the corporation. The big difference here is C corporations are also taxed at the corporate level. S corporations are treated like pass-through entities, thereby eliminating the “double taxation” issue often noted with C corporations.

Determining Which Type of Corporation is Right for You

Once again, there is not one corporation type that works best for all businesses. It really comes down to your long-term business goals, among other things. If you’re preparing to incorporate, contact the attorneys at Tobin, O’Connor & Ewing to schedule a consultation. Let one of our skilled business organization attorneys help you decide which business organization type is best for you.

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