What is the difference between a C or an S Corporation?
One of the key differences between the C-Corporation and the S-Corporation is taxation. For this reason, the S-Corporation is a good option for many small businesses.
For qualified owners of a domestic small business, the S-Corporation provides liability protection to each owner similar to the C-Corporation. However, with the S-Corporation owners can also take advantage of “pass-through taxation”. Because the S-Corporation is considered a “pass-through entity” by the IRS, the business itself isn’t taxed at the corporate level. Instead, business income or loss is “passed through” to shareholders who then report it on their individual income tax returns. This means that business profit can be taxed at a lower rate and business losses can offset other income on each shareholders’ tax returns.
In contrast, with a C-Corporation profits are taxed first at the corporate level and again when dividends are paid to shareholders on their personal tax returns. In some instances, however, a business owner may not want profits (or losses) to be reflected on their personal income tax return. Perhaps an owner has personal financial liabilities or legal issues that would make regular distributions undesirable. The C-Corporation can provide for greater separation of the business profit and loss from an owners annual reported personal income without affecting his or her equity in the business.
Consider the defining characteristics of the C-Corp and S-Corp as they relate to your own business as well as the resultant tax implications for owners.