Difference between C corporation and S corporation

A C Corporation and an S Corporation are two types of business entities recognised under United States tax law. A C Corporation is a legal entity that is separate and distinct from its owners (shareholders); whereas, an S Corporation is a closely held corporation that elects to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes.

What is a C Corporation?

A C Corporation is a legal entity that is separate and distinct from its owners (shareholders). It is taxed as a separate entity, meaning the corporation pays taxes on its profits at the corporate tax rate. Shareholders of a C Corporation are taxed separately on any dividends received from the corporation, resulting in potential double taxation.

Features of a C Corporation:

• Limited Liability Protection: Shareholders of a C Corporation enjoy limited liability protection, meaning their personal assets are generally shielded from the debts and liabilities of the corporation.
• Separate Legal Entity: A C Corporation is a distinct legal entity from its owners (shareholders), allowing it to enter contracts, own assets, incur debts, and engage in legal proceedings in its own name.
• Unlimited Number of Shareholders: There are no restrictions on the number of shareholders a C Corporation can have, allowing for broad ownership and investment opportunities.

What is S Corporation?

An S Corporation is a closely held corporation that elects to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes. Unlike C Corporations, S Corporations avoid double taxation because they are not taxed at the corporate level. Instead, income and losses flow through to shareholders, who report them on their individual tax returns.

Features of an S Corporation:

• Pass-through Taxation: S Corporations are not subject to corporate income tax at the federal level. Instead, income, losses, deductions, and credits “pass through” to the shareholders, who report them on their individual tax returns. This avoids double taxation.
• Limited Liability Protection: Like C Corporations, shareholders of an S Corporation enjoy limited liability protection, meaning their personal assets are generally protected from the debts and liabilities of the corporation.
• Single Class of Stock: S Corporations can only have one class of stock, which means all shareholders have the same rights and preferences. This simplifies the ownership structure and prevents complexities in shareholder agreements.

Difference between C Corporation and S Corporation

Basis	C Corporation	S Corporation
Meaning	A C Corporation is a legal entity that is separate and distinct from its owners (shareholders).	An S Corporation is a closely held corporation that elects to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes.
Ownership and Shareholders	C Corporations can have an unlimited number of shareholders, including non-US residents and other corporations. They can issue different classes of stock.	S Corporations are restricted to 100 or fewer shareholders, who must be US citizens or residents. They can only issue one class of stock.
Taxation	C Corporations are subject to double taxation, where the corporation pays taxes on its profits and shareholders also pay taxes on dividends received.	S Corporations pass through income to shareholders, avoiding double taxation. Profits and losses are reported on shareholders’ personal tax returns.
Formalities	C Corporations are subject to more stringent corporate formalities, including regular meetings, record-keeping, and documentation requirements.	S Corporations have fewer formalities compared to C Corporations, making them simpler to manage in terms of administrative requirements.
Tax Deductions and Losses	C Corporations can carry forward net operating losses to offset future profits and can deduct fringe benefits provided to employees.	S Corporations pass through losses to shareholders, who can deduct them on their personal tax returns, subject to limitations.
Formation	C Corporations can be formed by filing articles of incorporation with the state and complying with state-specific requirements.	S Corporations begin as C Corporations, and then elect S Corporation status by filing Form 2553 with the IRS and meeting eligibility criteria.
Stock Options and Equity Incentives	C Corporations have more flexibility in structuring stock options and equity incentives for employees and key personnel.	S Corporations have limitations on issuing stock options and equity incentives, which may impact their ability to attract and retain talent.
Foreign Ownership	C Corporations can have foreign shareholders and can conduct business globally without restrictions.	S Corporations cannot have non-resident alien shareholders or more than 25% of their income from passive investments.
Perpetual Existence	C Corporations have perpetual existence, meaning they continue to exist even if shareholders change or pass away.	S Corporations also have perpetual existence, providing stability and continuity to the business.

C and S Corporation – FAQs

Can non-US residents or corporations own shares in a C Corporation?

Yes, C Corporations can have both domestic and foreign shareholders, including individuals, other corporations, partnerships, and certain trusts.

Can C Corporations engage in a wide range of business activities?

Yes, C Corporations can engage in various business activities and industries, with no limitations on the types of businesses they can operate.

Can C Corporations issue multiple classes of stock?

Yes, C Corporations can issue multiple classes of stock with different rights and preferences, providing flexibility in ownership and control.

Can an S Corporation have more than one class of stock?

No, S Corporations are limited to one class of stock, meaning all shareholders have the same rights and preferences.

Can S Corporations provide employee benefits and stock options?

Yes, S Corporations can provide various employee benefits such as retirement plans, health insurance, and stock options, similar to C Corporations.

How does the number of shareholders affect S Corporation status?

S Corporations are limited to a maximum of 100 shareholders. Exceeding this limit or having ineligible shareholders may result in the loss of S Corporation status.