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Understanding The Basics of C-Corp and S-Corp

  Sanjiv Gupta CPA  Published 

C-Corp and S-Corp similarities:

 Limited liability protection: Both C-Corp and S-Corp work on like terms to provide similar liability protection to their stockholders/ shareholders. This group is kept away from liabilities to share company debts.

 Independent entities: Both C-Corp and S-Corp are individual sovereign bodies filed with the state.

Constitution: C- Corp and S-Corp have their own board of Directors and CEOs, executives and shareholders. The units work in co-operation and every group has its distinct fortes.

C- Corporation Drawbacks:

Extensive set-up procedure: A corporation designated under Subchapter C has to have a potential capital investment. Establishment of such a corporation requires thousand of dollars, merely as procedure fees: attorney consultation and planning fee, government fee, judicial fees to the state, etc. this is a major drawback for a C-Corp.

Double taxation: Incomes received by a C-Corp undergo double taxation; separate on profits and separate on gross. S-Corporation profits, on the other hand, are by-passed and taxed on the shareholders' level.

Rules:  A C-Corp falls under thorough annual scrutiny of the Government/ state jurisdiction. With a number of debts, lawsuits and other financial commitment such Corporation types are required to observe a trove of rules and regulations. This is time-consuming and tiring.


Why S-corporation is a better choice?

 While a C-Corp. is the usual type, those that are categorized as under Subchapter S of revenue code, have a specially elected tax board with the Internal Revenue Service. This helps S-corps to enjoy certain tax exemptions. The two most specific merits that an S-Corporation enjoys over C- Corp are:

  •  No taxation on profits at a corporate level
  • Restriction of ownership

C-Corps have to deal with 35%+extra on profits and liquidation while an S-Corporation has just to pay a minimum of 15% tax at shareholders' level. This can result in as much as a 30% difference in tax liabilities, the C-Corp definitely paying the higher percentage.

Another point of consideration is that an S- the corporation can manage the company losses from personal funding initially. The amount accountable however can be subtracted on profit return.

Entities that want to go public can opt for a C-Corporation certification, while others can fill up Form 2553 to register themselves as under S- Subchapter of the IRS.