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C Corp vs S Corp: Differences, Benefits, & Comparison Table

c corporation

Jane Haskins practiced law for 20 years, representing small businesses in startup, dissolution, business transactions and litigation. She has written hundreds of articles on legal, intellectual property and tax issues affecting small businesses. Once you’ve selected an original name, you must fill out and file the Articles of Incorporation form, also known as a Certificate of Incorporation, with the secretary of state’s office.

What is the meaning of C corporation?

A C corporation (or C-corp) is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity. C corporations, the most prevalent of corporations, are also subject to corporate income taxation.

Choosing between the different options can be frustrating. The right option for one company may be a horrible choice for the next. Each entity type offers a unique blend of legal and tax implications that are enough to make even a seasoned practitioner’s head spin. ● The costs of converting an entity can be expensive and difficult, depending on your state laws. https://www.bookstime.com/ Also, once a change is made, it may be difficult to covert back if the tax laws change yet again or if your business model shifts. Keep in mind that it is always wise to consult with tax professionals and legal professionals during any business formation process. These professionals will give you a basic understanding of the options that are available to you.

C Corporation: Everything You Need to Know

A Delaware C corporation is a separate entity from its shareholders, and therefore C-corps offer limited liability protection to Directors and shareholders. In addition, C-Corps differ from other corporations in taxation and ability to raise investor capital, though they share the same structure as other corporations. A C corporation is a legal structure for a corporation where the company’s assets are separate from the owners’ assets. Shareholders contribute the money or assets the corporation uses to conduct its business and the corporation issues shares of its stock to shareholders as evidence of ownership. Shareholders are entitled to any dividends the corporation pays, and if the corporation liquidates, they are entitled to all of the corporation’s assets after all creditors are paid. Once a corporation is formally created, the corporation and its owners have ongoing obligations that must be fulfilled in order to retain corporation status.

c corporation

Certain trusts and estates are allowed as stockholders, but partnerships and corporations may not own a stake in an S corporation. Fundamentally, sole proprietorships are intended for simple, one-owner businesses. Think freelancers, consultants, small service businesses, food stands, etc. Sole proprietorships do not have shares or ownership units which means the only exit option is to sell the assets of the company. The primary difference between an S corp and a C corp is the manner in which they are taxed by the IRS. A C corp has its profits and losses stay in the business and files its own tax returns.

What is a C Corporation?

S corporations are a very popular entity choice for small and mid-sized privately held companies. Like proprietorships, a major downside of partnerships is that the entire taxable income of the partnership is generally subject to FICA taxes. This is a key reason most larger, highly profitable companies are not partnerships. Also, for c corporations, losses do not passthrough to owners, while passthrough owners get to use the entity’s losses to offset other income on their returns. Sole proprietors may consider incorporating to shield some of their compensation from the higher individual rates, 37% for individuals but just 21% for corporations.

That law limits the ability of individuals to deduct state income taxes on their personal tax returns. That is a problem for pass-through business owners who are paying large amounts of state income tax on their personal returns (remember pass-throughs do not pay their own income taxes).

What Is a C Corporation (C corp)?

As far as leadership structure, a C corp has an elected board of directors that can be determined by the company’s shareholders. Two other popular business entity structures in the US are the S Corp and the LLC. They provide many of the same protections as a C Corp, but have less formal rules on taxation, governance, and compliance. If you’re registering as any of these entities, you’ll most likely have similar requirements to get started.

  • Depending on the shareholders’ income level, the $79 dividend could be taxed at a rate of up to 23.8 percent ($18.80).
  • Without a distinct business entity, however, there’s no legal difference between the business’s assets, debts and other liabilities and those of the owner.
  • We are not a law firm, do not provide any legal services, legal advice or «lawyer referral services» and do not provide or participate in any legal representation.
  • This person is also called the chief financial officer .
  • The form spells out the basics of the business, including the name, address, purpose and incorporators.