Many people make the mistake of thinking they must choose between two options when deciding how to incorporate a business: C or S.
While it’s true that C and S corporations are the two main types of business incorporation, you technically don’t have to know about S corporations in order to start a business. But that doesn’t mean you shouldn’t know the basic differences between the two.
Taxation is one of the main factors business owners consider when choosing to file as a C or S corporation.
C corporations are generally referred to as a regular corporation, and they pay taxes in accordance to chapter C of the IRS tax code. Essentially, C corporations are legal entities that are held liable for their own debts and must pay taxes. Owners of a C corporation are called shareholders, and are protected from company actions. In addition to business taxes, shareholders also have to pay personal taxes.
In contrast, S corporations are companies that meet certain requirements to avoid the double taxing disadvantage that owners of C corporations must deal with. S corporations are regulated under the subchapter S tax code, and are still considered to be distinct legal entities by the IRS; however, only the income that goes through the shareholders is taxable.
Both C and S corporations must fill out and file articles of incorporation in the state where their business is headquartered. If you want to remain a C corporation, then the work stops there. But if you’d like to become an S corporation, you will also need to sign and file form 2553 with the IRS. The IRS will evaluate if your company satisfies the five S corporation eligibility requirements: domestic corporation (in the U.S.), 100 shareholders or less, one class of stock or less, not specifically ineligible, and have allowable shareholders.
Certain corporations—financial institutions and insurance companies—are prohibited from filing as an S corporation.
Picking C vs. S
Choosing whether your company should be a C or S corporation isn’t a permanent decision and doesn’t necessarily have to be made right from the beginning. C companies can file to become an S corporation anytime after the corporation is formed—weeks, months, or even years later. An S company can also covert back to a C corporation by filing a request with the IRS.
To learn more about the differences between C and S corporations, check out MaxFillings.com for a detailed comparison guide.