There are three main options when it comes to setting up a business. These include an LLC, C Corporation, or S Corporation. The difference in these companies filling status goes beyond just an alphabet.
In this article, we will share with you the advantages and drawbacks of S Corp and C Corp to help you make an informed decision.
Savvy And Suite is a leading company that offers a wide range of personal tax and business tax services to its clients. The expert tax professionals at this company help businesses in filing their S Corp taxes.
Tax can be seen as the major factor that shows the difference between S Corp and C Corp. A C corporation has to pay tax on their income, as well as on whatever income is obtained as an employee, or owner.
On the other hand, an S corporation does not need to pay tax. The corporation and the other owners /shareholders have to jointly report the business revenue (business income and losses) as the personal income of the company.
In the case of a C Corp, a company can subtract 100% of the charitable donations and contributions on the corporate tax return till the donations do not go beyond ten percent of the overall income of the company.
Taxes are considered to be the biggest advantage of an S Corporation. Owners of S Corps are liable to only pay their personal tax return and not corporate tax. A majority of S Corps can subtract up to 20% of the business income on personal tax returns. S Corp has the opportunity to write off the losses incurred in the business on their personal tax return.
When talking about S Corp vs C Corp, we will also discuss the formation of C Corporation. At the time of filing articles of incorporation in the state, a company gets the designation of a C Corp.
C Corporations are comparatively easier to establish than an S Corp. It involves less amount of documentation. As S Corporation is not the default status, a company needs to file Form 2553 to get this status.
C Corps does not have any limitations in the area of ownership. Here, in this company filing status, any entity can become the owner. Furthermore, there can be any number of owners in that company. However, in the case of S Corp, the number of owners is only restricted to 100 shareholders. They have to be U.S. citizens.
The limited number of stockholders makes them more involved in daily business operations. In this case, employees can even be shareholders of the corporation.
Though C Corporations has been the default status for company filing, they are not necessarily correct for each business. If you as a business is fine with getting taxed at the both corporate level and the personal level, then you can go ahead and become a C Corp.
However, if you want to cut down on corporate taxes and deal with profit and losses via your personal income tax, then becoming an S Corp would be a good decision.