Both a C corporation (also known as a regular corporation or standard corporation) and an S corporation (also known as a small business corporation or Subchapter S corporation) are legal entities that are separate and distinct from their owners. The main difference between the two is the way in which they are taxed. A C corporation is taxed as a separate entity, while an S corporation is a pass-through tax entity. Here are some of the advantages and disadvantages of incorporating as a C corporation versus an S corporation:
Advantages of a C corporation:
- Unlimited life: A C corporation has unlimited life, meaning that it continues to exist even if the owners change or die.
- Ability to issue stocks: A C corporation can issue stocks, which can be bought and sold by the shareholders.
- Potential for tax-free contributions to employee benefits plans: C corporations may be eligible for certain tax benefits, such as the ability to make tax-free contributions to employee benefits plans.
Disadvantages of a C corporation:
- Double taxation: The profits of a C corporation are taxed at both the corporate and individual level when they are distributed to the shareholders as dividends. This is known as double taxation. With current business tax rates and the reduced capital gains tax rate for dividends, this can still result in lower taxes than pass-through entities such as an S Corp. or LLC.
- Complex regulations and reporting requirements: C corporations are subject to more complex regulations and reporting requirements than other business structures, such as sole proprietorships and partnerships.
- Higher costs to set up and operate: C corporations may be more expensive to set up and operate due to the need for meetings and record-keeping.
Advantages of an S corporation:
- Pass-through taxation: The profits of an S corporation are passed through to the shareholders and taxed at the individual level, avoiding the double taxation that occurs with a C corporation.
- Potential for tax benefits: S corporations may be eligible for certain tax benefits, such as the ability to deduct certain business expenses and the potential for tax-free contributions to employee benefits plans.
- Reduced set up and operating costs: Because the organization of an S corporation is less complex than a C corporation, the set-up and regulatory costs can be lower. But by the time you’re looking at using the C corporation structure, this is usually a very minor factor.
Disadvantages of an S corporation:
- Shareholder restrictions: There are strict rules regarding the number and type of shareholders that an S corporation can have, and not all individuals or entities are eligible to be shareholders.
- Complex regulations and reporting requirements: S corporations are subject to more complex regulations and reporting requirements than other business structures, such as sole proprietorships and partnerships. However, they can still be less complex than C Corporations.
It’s important to consider the specific needs and goals of your business when deciding whether to incorporate as a C Corporation, an S Corporation, or a less complex structure such as an LLC. Bookkeeping and accounting for a C Corp. or S. Corp can be complex and often requires experienced professionals. Fortunately, we know where to find a few of those!