Jan 24

S Corporation vs C Corporation

S and C have you So Confused?

Worry Not, The Lawyer In Blue Jeans Group is Here to Explain:

According to Forbes, the choice between an S Corporation tax election and a C Corporation tax election can be a “critical” one for small businesses in California. Though many entrepreneurs now favor an LLP or LLC designation over a traditional corporation, it’s still important for business owners of all kinds to understand the purpose of an S and C corporation, what makes them unique, and how deciding between each designation can impact the way they do business going forward.

Similarities Between S and C Corporations

Before we delve into what makes them different, let’s talk about what makes them similar. Like an LLC or LLP, both an S and C corporation are designed to provide protection to its members, or shareholders, from business debts and liability. They share commonalities in that they must file articles of incorporation with the state, must be owned by shareholders and operated by officers and a board of directors, and must pay taxes. What really differentiates a C Corporation from an S Corporation is in the details of how they’re structured and taxed, so let’s examine those differences a little bit more in-depth.

S Corp vs C Corp

C Corporation

All corporations formed in the State of California start their life as C Corporations (with many electing to transition to an S Corporation). C Corporations are the right choice for larger businesses, as unlike C corporations, they can be owned by more than 100 shareholders. Shareholders of an S Corporation enjoy more flexibility than a C, and can be made up of non-resident aliens, other corporations, and LLCs – a more diverse pool than an S Corporation allows. Because of their complicated tax structure, C Corporations are often subjected to double taxation on both corporate income and individual dividends of the shareholders, something that tends to steer many small businesses away from the designation.

S Corporation

For small businesses with 100 shareholders or less, an S Corporation is often the best choice. Unlike a C Corporation, an S can be owned by individuals, estates, or qualified trusts of U.S. citizens or resident aliens only. S Corporations also only allow a single type of shareholder, and are a pass-through entity that isn’t subjected to double taxation. Businesses can elect to establish themselves as a C corporation at any point in their operation, but the complication and challenge of the changeover increases the longer they remain active as a C Corporation, and can also have tax repercussions.

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Though this only serves as a brief overview of these two types of corporations, it’s clear that S and C are more similar than they are different, and the complexity and intricacy of their specifics make choosing between them a decision you don’t want to make on your own. Retaining qualified legal counsel, like The Lawyers in Blue Jeans Group, is a great way to ensure that each decision you make will help steer you towards the path to success, and keep your business growing. Call us today: (619) 683-2545

For more information on an C Corporation, click here!

For more information on an S Corporation, click here!