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Difference between C Corp and S Corp

  Sanjiv Gupta CPA  Published 
Difference between C Corp and S Corp

Difference between S Corporation and C Corporation.

Both types of corporations are quite common in the United States and names very similar. However, there are major differences between these two types of corporations.

Since you are reading a Tax Blog, we can start with Taxation.

Taxation:  Tax is one of the key differences between these two types of corporations.  C Corporations are separate taxable entities.  C Corporation must file a corporate tax return and report its profit and losses to the IRS and to the state.  All profits are taxed at the corporate level.  Income distribution to the shareholder is taxed as individual income.  However, business losses do not pass through to the shareholders.  In Other Words, a corporation pays the tax on income and then pays the dividend to the shareholder.  Shareholder pays the tax on the dividend received.

S Corporations are better entities in this regard.  S Corporations are pass-through tax entities.  There is no tax at the corporate level.  All profits and losses are passed through the corporation and reported on each shareholder's personal tax return. Taxes are paid based upon each shareholder's personal income and deductions.

Ownership of Corporation:  S Corporations can not have non-US citizens/residents as shareholders.  S Corporations can be the owner by another C corporation or another S Corporations, LLCs, trusts or other partnerships. Moreover, S Corporations can have no more than 100 shareholders.

C Corporation does not have such limitations. C corporations can have an unlimited number of shareholders and can be owned by other business entities.  C corporations can also have multiple classes of stocks whiles corporations are limited to one class of stock.

I would like to point out that s corporations and c corporation are similar in the way they are set up with the franchise tax board.  However, a corporation must elect to become an S corporation by making a timely filing of form 2553 with the IRS.  Moreover, all the shareholders of the corporation must agree in writing to the S corporation election.

Reduced Taxes:  S Corporation owners can get paid in the form of dividends and reduce their medicare and social security taxes.

Can you convert from C Corporation to S Corporation?

Of course, you can.  However, don’t do it just yet. Consult with your tax professional to ensure this is the right choice for you.  Converting from C to S corporation may not be ideal for you if your corporation is operating at a loss. You may end up owing a big tax bill if the following condition is met:

  • The company was C corp prior to the S corp election.
  • The company has recognized built-in gain within the 10-year recognition period.
  • The net recognized built-in gain for the tax year doesn’t exceed the net unrealized built-in gain minus the net recognized built-in gain for prior years in the recognition period.

I know it sounds complicated.  That is why I was suggesting that you talk to a tax professional before converting your company from C Corporation to S Corporation.