When choosing between an S corp and a C corp, it helps to understand the differences before making the call. That way, you will make an informed decision that is aligned with your business objectives.
The major difference between the two types of corporations that would interest you as a business owner is the tax regimes applicable. An S corp is a pass-through tax entity, while a C corp is a separate taxable entity.
Therefore, the S corp does not pay taxes as a legal entity but ‘passes them through’ to shareholders. On the other hand, taxes are paid at both corporate and individual levels with a C corp. The corporation pays corporate tax, and the shareholders pay income taxes on dividends.
Membership
S corporations are limited to 100 shareholders who must all be American citizens or permanent residents. However, there are no such restrictions with C corporations. C corps can issue stock certificates to an unlimited number of owners even if they are not citizens.
Class of stock
S corps only have one kind of uniform stock available. For instance, such an entity cannot establish a class of stock that gets dividends and another that doesn’t. A C corp can issue multiple classes of stocks, from common and preferred shares to Class A and B shares.
There are other slight variations between the two legal entities, such as the startup costs and the types of owners.
Making the best decision
The most suitable type of corporation depends on the objectives you have in mind and the nature of your business, among other factors. Remember, the legal environment is ever-changing, and you should stay updated with the current laws.
It is best to reach out for legal guidance and get a broader perspective of how things work to make the most out of what each entity has to offer.
