C-Corporation vs S-Corporation: What’s the Difference?

by | Jul 27, 2021 | Financial Advice

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Every business has its own needs when it comes to taxes, ownership, and the day to day operations. Different types of corporations offer unique benefits and rewards. Each type of corporation also has specific limitations that might prevent the company from functioning efficiently. It’s important to look at the impact taxes will have on your company as well as the role the business structure will pay.

C Corporations

Unless you file specifically as an S Corporation, your business will automatically fall under the heading of a C Corporation. C Corporations pay taxes twice. First, the company will pay taxes on a portion of its income. The owners of the company will also pay taxes on any dividends they earn. Double taxation may eventually affect your overall profits. One benefit of a C Corporation is that charitable contributions can be deducted as well as other benefits as long as the employees can take advantage of them.

S Corporations

S Corporations handle taxes a little differently. With this type of tax structure, each individual declares their portion of the company’s income on their own tax returns. Individuals who fall into this category qualify for a business income deduction. The benefit of this is that their profits won’t be taxed. With an S Corporation, an individual can write off their losses on their own personal tax returns.

Understanding Ownership

When it comes to ownership within the company, S Corporations only offer one type of stock. The stocks can only be purchased by citizens of the United States. An S Corporation can only have 100 shareholders. C Corporations are much more flexible when it comes to ownership and how shares are handled.

S Corporations and Reasonable Salary Expectations

Unlike a C Corporation that has no salary expectations, an S Corporation must be able to show that it can pay its owners a reasonable salary. If it is determined by the IRS or other entity that you are not paying yourself an adequate wage in terms of self-employment tax, you will b audited. Your education, level of experience, and the type of work you do must all be taken into consideration when setting your wage.

Raising Capital

An S Corporation puts strict limits on how you can raise money. Because you are only allowed to have 100 or fewer shareholders and all owners must be U.S. citizens, this could dramatically restrict your ability to take on new angel investors or other individuals who could provide you with venture capital. If you are interested in pursuing every avenue of opportunity, a C Corporation will allow you to do so with fewer obstacles.

Understanding business structure and the role that taxes may play in you choice will allow you to consider both options before making a final decision. Having the right corporation will allow you to achieve your business goals and keep your company moving forward. Talking to a small business lender may be an option you can look into to learn more. They will help you find the answers you need and may be able to provide you with the working capital you need in just a few hours instead of weeks.