Understanding the Differences Between S Corp and C Corp | Columbia Law School (2024)

When incorporating a business, entrepreneurs have several options to choose from, including S corporation (S corp) and C corporation (C corp). Understanding the differences between the two business structures is crucial to making an informed decision for a strong legal foundation for your business.

What Is a C Corp?

A C corp is legally distinct from its shareholders. Accordingly, shareholders are not personally liable for corporation debts or actions. Their personal assets, such as real estate and liquid capital, are protected from being used as collateral or repayment if something goes wrong in business.

Some other key characteristics of C corps include:

• Double taxation. C corps are taxed on corporate income, and shareholders are taxed again for the dividends they receive from the corporation.
• No major restrictions on who can own shares or how many shares can be sold.
• The ability to issue more than one class of stock.

How To Form a C Corp

The typical steps to form a C corp are:

1. Choosing a unique name for the corporation.

2. Appointing officers to the C corp including: a registered agent, a CEO (Chief Executive Officer), and a board of directors.

3. Filing an Articles of Incorporation or Certificate of Incorporation with their state.

4. Adopting bylaws.

5. Holding an initial meeting of shareholders and directors.

6. Issuing stock to shareholders.

7. Registering with the U.S. Securities and Exchange Commission (SEC). (Note that C corps that issue stocks to fewer than 35 shareholders do not need to follow this step.)

8. Applying for county, state, and local business licenses as applicable.

9. Filing Form SS-4 to receive an employer identification number (EIN) from the Internal Revenue Service (IRS).

C corps are automatically taxed under Subchapter C of the Internal Revenue Code, so there is no need to file additional documentation with the IRS to be taxed as a C corp.

What Is an S Corp?

An S corp is a business structure and tax designation that passes its taxable credits, income, losses, and deductions directly to its shareholders.

To qualify for S corp status, businesses must meet specific requirements set by the IRS. Some key characteristics of S corps include:

• Shareholder limitations. S corps cannot have shareholders that are partnerships, corporations or non-resident alien shareholders and cannot have more than 100 shareholders in total.

• Stock limitations. S corps may only have one class of stock.
• Pass-through taxation. Shareholders of S corps report their losses and incomes on their personal tax returns and are taxed at personal income tax rates. As a result, S corps can avoid the double taxation on corporate income that C corps experience.

How To Form an S Corp

To create an S corp, business owners generally do the following:

1. Create an LLC (Limited Liability Corporation) or C corp.

2. Check to see if their company qualifies for S corporation status. To qualify for S corporation status, a business owner’s corporation must meet the following IRS requirements:

• Be a domestic corporation that is based and operates in the United States.

• Have no more than 100 shareholders.

• Have only allowable shareholders — shareholders may only be certain trusts, individuals, and estates.

• Not be an insurance company, financial institution, or a domestic international sales corporation.

• Have only one class of stock — for instance, it cannot have a preferred stock or a two-tiered common stock system.

3. File IRS Form 2553. Once the business owner has confirmed that their company meets all the IRS requirements, they must file IRS Form 2553, Election by a Small Business Corporation and have it signed by their company’s shareholders.

4. File a Form SS-4. After filing IRS Form 2553, the entrepreneur should file Form SS-4 to receive an EIN from the IRS.

Is a C Corp or S Corp Better?

C and S corps are both potentially great options for businesses, depending on their circ*mstances and needs. The key similarity is the legal distinction between the shareholders’ personal assets and the corporation. Besides that, there are some notable differences.

Business owners often elect to be a C corp if they find the following advantageous:

• Greater tax benefits. C corps offer better tax advantages due to an increased ability to deduct employee benefits. C corps may also provide tax savings if the corporation is not making income distributions to shareholders or the corporate tax rates are lower than personal rates.
• Unlimited number of shareholders.
• Self-employment tax savings. C corps can provide self-employment tax savings if owners are classified as employees.
• Additional ways to raise capital. Capital can be raised by selling stock.

• The ability to issue more than one class of stock. C corps can issue more than one class of stock, including tiered options.

On the other hand, business owners may find the following about S corps more valuable:

• The ability to avoid double taxation. Since S corps are pass-through entities, S corp owners are not taxed at the corporate level. Taxes are only paid at the personal level by shareholders.
• Business income deductions. Due to Section 199A of the Tax Cuts and Jobs Act of 2017, eligible S corp shareholders can get a deduction of up to 20% of net qualified business income.

The Next Step: Starting a Business

The decision of the best legal structure is just one of the important steps to starting and scaling a successful business. Columbia Law’s 100% online certificate course, A Legal Toolkit for Starting and Scaling Your Business, has been designed for business owners to learn important legal aspects of running a business and is available to help entrepreneurs like you.