S-Corp Vs. C-Corp In 2024 – Which Is Best For Your Business?

Differences Between S-Corp vs C-Corp 

Formation

C-corp is considered the standard corporation and it is formed by filing articles of incorporation along with the necessary filing fees. Though the formation process varies with the state, the three most common steps are:

• Choosing your business name
• Choosing a registered agent
• Filing articles of incorporation with the secretary of state

On the other hand, S-corp is not a normal business entity but a tax election that an eligible corporation may choose. Therefore, there is nothing like forming an S-corp but you can convert your corporation to an S-corp by filing IRS form 2553.^[2]

Ownership

While these two entities are both owned by shareholders, S-corp and C-corp differ in terms of ownership in various ways. 

• Ownership: 

Each share of an S-corp common stock gives shareholders an equal ownership stake in the business. This is contrary to C-corporations where there is unequal ownership of stakes. For instance, one share of preferred stock may offer a greater ownership stake in the company or company dividend than one share of common stock. 

• Shareholder restrictions: 

Restrictions on ownership are one of the main differences between these two entities. Here is a summary of S-corp shareholders restrictions:

• Must be a domestic corporation
• Can only issue a single class of stock
• Cannot have more than 100 shareholders
• Can be an individual, estate, or some trust, but not other S-corps, LLCs, partnerships, corporations, and even some other trusts.

On the other hand, C-corporations have no restrictions on ownership. Anyone or other business entity can own a C-corporation and you can have an unlimited number and different classes of shareholders. 

• Stock: 

Even though the two corporations can issue stocks, S-corp only issues one class of stock while C-corporation issues different classes of stock. To be precise, S-corps can only issue common stock while C-corps issue both common and preferred stock.

Taxation

The most popular difference between C-corporations and S-corporations is tax status. S-corp is treated as a pass-through entity for tax purposes. Meaning, that the corporation distributes company income and loses it to the individual shareholder as dividends. Each shareholder then reports their share of the business’s federal income and losses on their personal tax return. 

Additionally, each owner of S-corporations can deduct 20% of qualified business income from their income tax as expressed by the Tax Cut and Jobs Act of 2017. However, the deduction is set to expire in 2025 unless Congress extends the law. 

C-corp tax is subject to double taxation where the business profit is taxed at both corporate income and federal income. 

Before the profits can be distributed among the owners, the corporations must pay corporate income tax at the corporate rate. The corporation then pays its shareholders dividends from after-tax profits as dividends. The shareholders then pay their federal tax from the dividends. 

That makes the C-corp tax more costly compared to the S-corp tax and it is one of the reasons we would recommend S-corps for small businesses. 

Capital Accumulation

S-corps are considered pass-through entities for tax purposes and each shareholder only pays federal income tax. For that reason, S-corp accumulates a lot of capital from tax advantages. 

However, S-corp limits its ability to accumulate capital from new investors by limiting the number of shareholders. Besides, it is very hard for S-corps to obtain equity financing due to the fact that they are restricted to U.S. citizens.

Accounting Method

As long as you don’t keep an inventory, S-corps allows you to use either cash or an accrual accounting method. However, you will have to use accrual accounting if you maintain an inventory. 

C-corporation must use accrual if the annual gross receipts for the last three years were more than $5, otherwise, they will use the cash method. However, tax shelters and general partnerships that have C-corps as partners but fail the $5 million test must also use the accrual method. 

S-Corporation Vs C-Corporation: The Similarities 

By default, C-corp is the standard corporation under IRS rules. S-corp however is a subchapter of a standard corporation that has elected special tax status with the IRS. That means that S-corp is a kind of substructure of C-corp, and so, they share a lot of similarities.  

With that being said, here are some of the similarities between the two corporations. 

Ownership

Corporations are owned by shareholders or stockholders. The stockholders own shares in the company but do not have the right to participate actively in the management of the company. Instead, they are expected to choose the board of directors who actively participate in various business affairs.  

Limited Liability Protection

The company owners are typically not liable for business debts and liabilities. That is to say, when a vendor sues your company, the company assets will be used to pay the losses while your assets remain intact. 

As corporations, both S-corps and C-corps are legally separate entities from the owners. Put simply, this means that stockholders are not personally liable for the business’s debts or obligations. This is a major selling point of corporations.

Structure

Corporations have shareholders, officers, and directors. The stockholders own the corporation but it is the corporation that owns the business. The stockholders elect the board of directors to handle management and policy issues. The work of day-to-day running of the business is in the hands of the CEO, COO, and CTO among other officers of operation. 

Separate Legal Entities

Corporations are regarded as separate legal entities with the ability to conduct business in their own names. As such, both S-corp and C-corp can own property, borrow money, enter into a business contract, pay tax, sue, and be sued.

Being a separate legal entity, most states may rule that the company continues operating even when a shareholder leaves or joins the business. 

Filing Documents

The registration of a corporation involves filing articles of incorporation/certificates of incorporation with the secretary of the state. This applies whether you choose to be taxed as an S-corp or C-corp. Once the corporation is formed, you can now choose to be taxed as S-corp during which you may have to fill out a few documents depending on the state. 

Personal Income Taxes

Corporations distribute business income or profit among shareholders as dividends and this is treated as taxable income. The shareholders then report their income on their tax returns.

S-Corporation

• Single-layer taxation

S-corps are known to offer tax advantages over C-corps due to their single-layer taxation. In essence, S-corporation doesn’t pay corporate income tax. Instead, each shareholder reports the company’s share of income on their tax return. 

• 20% qualified business income deduction

Up to 20% net deductions for the eligible S-corp shareholders given by the Tax Cuts and Jobs Act of 2017 is another tax advantage. 

• Pass-through of losses

As mentioned before, S-corporations are treated as pass-through entities. Just as the company income, the company losses are pass-through to the company owners who can then use the losses to offset the income.

C-Corporation

• Unlimited number of shareholders and ownership

C-corporations can be formed and owned without limitation on the number of shareholders. Besides, any individual, other types of corporations, LLCs, trusts, or estates from any part of the world are free to own C-corps. 

• No restrictions on classes of stock

Unlike S-corps, C-corps can issue more than one class of stock, including common and preferred stock. 

• More options for raising capital

Given that C-corporations do not impose the same restrictions you encounter within S-corps, it makes it easier to acquire equity financing.

S-Corporation

• A limited number of shareholders

S-corps owners are only limited to 100 shareholders. This limitation in ownership results in limitations in several other aspects. For instance, the company’s ability to raise capital from new investors. 

• Other shareholder restrictions

Shareholders must be individuals and US Citizens or residents. That makes it harder for S-corps to obtain equity financing as venture capital.

• Preferred stock is not allowed

For investors who want multiple classes of stocks, this is not your entity. S-corm only issues common stock, meaning the preferred stock is not allowed.

• Transfer Restrictions

To make sure they don’t end up with ineligible shareholders, most S-corps restrict their shareholders’ ability to transfer or sell their shares. Ineligible shareholders may make the IRS terminate its S-corp status. 

C-Corporation

• Double taxation

C-corps pay income taxes on their earnings and the owners again pay taxes on dividends. That means C-corp shareholders report to the corporate tax return and federal tax returns resulting in double taxation.