A corporation (business organization) is treated as a sovereign entity. Internal Revenue Coding and Taxation Policy declare that all benefits of a C-Corporation will be taxable separately from that of its owner. The profits of S-Corporations on the other hand are taxable on personal returns of the shareholders. This article will present a C-Corp Vs S- Corp scenario and help analyze the pros and cons of both.
There are some basic points of consideration when comparing C-corporation Vs S-Corporation: Corporate level taxation, employment taxation, Business expansion plan, IRS allowance of S-Corporation. Both types have their own merits and demerits. What makes a difference is choosing the correct type of corporation. This will vary from company to company.
C-Corp and S-Corp similarities:
Limited liability protection: Both C-Corp and S-Corp works 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 has their own board of Directors and CEOs, executives and shareholders. The units work in co-operation and every group has their distinct fortes.
C- Corporation Drawbacks:
Extensive set-up procedure: A corporation designated under Subchapter C has to have 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 a S-Corporation enjoys over C- Corp are:
- No taxation on profits at corporate level
- Restriction of ownership
C-Corps have to deal with 35%+extra on profits and liquidation while a S-Corporation has just to pay a minimum of 15% tax at shareholders level. This can result to as much as 30% difference in tax liabilities, the C-Corp definitely paying the higher percentage.
Another point of consideration is that a S- corporation corporate 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 IRS.