When you’re just starting a business, you have a lot of momentum behind you.
You’ve got the perfect business idea, you’ve written all of it down into a stellar business plan, and you even have a catchy, one-of-a-kind business name.
That’s it, right? You’re ready to roll.
Not just yet. Many aspiring small business owners come screeching to a halt when they realize that before they open their doors for business, they need to choose a business entity—and choose carefully and deliberately.
But as a small business owner, not a lawyer, you can easily get lost in all the business entities there are to choose from. S corp vs. C corp vs. LLC vs. sole proprietorship … how are they different, and which one is right for you?
Let’s look closely at the corporation structure, specifically an S corp vs. C corp. Here are all the differences small business owners need to know—and how to choose the best one for your business.
A C corporation is a standard business entity for small businesses and is probably what most people think of when they think of a typical business.
Technically, a C corporation is the same as a corporation and is the default formation of a corporation—unless you slap an S on your corporation, you have a C corporation. A C corp is the most common type of corporation in the United States.
In a normal C corporation, the business is owned by individual shareholders who hold shares of the company. This means that corporations are separate legal entities. Corporations have what’s called liability protections. Put simply, shareholders of corporations are usually not liable for business debts or liability.
The shareholders have control over larger policy issues regarding the company, but business issues are left to the company’s board of directors, who are elected by the shareholders.
The normal, day-to-day work of running the business is on the officers of the C corporations—like the CEOs, COOs, and CTOs.
If you want to structure your business as a C corporation, you have to file certain documents with your state government. In almost all cases, these are articles of incorporation. And once you’re up and running, you have certain compliance and documentation obligations as a corporation—like issuing stock, paying fees, holding shareholder, and director meetings.
An S corporation, on the other hand, is just a slight variation of a C corporation.
An S corporation is structured just the same as a C corporation: Shareholders own the business and some high-level decision making, the board of directors (appointed by the shareholders) dictate the direction of the business, and executive officers manage the day-to-day activities of the business.
An S corporation also has liability protection—shielding the shareholders from any responsibility for business debts and liabilities. An S corporation also has the same documentation and compliance obligations. S corporations need to file their articles of incorporation and need to issue stock, pay certain fees, hold shareholder and director meetings, and so on.
When it comes S corp vs. C corp, you’ll find that both business entities are really more similar than they are different.
But with that being said, there are some key differences between an S corp vs. C corp that you need to consider before choosing between the two.
So, S corps vs. C corps … what are the differences you need to know?
The differences between S corps vs. C corps come down to three major categories: ownership, shareholder rights, and taxation—with the biggest difference being taxation.
One of the major differences between S corp vs. C corp structures is the restrictions on corporate ownership.
C corporations have no restrictions on ownership.
That means that, if you were to structure as a C corp, you can have an unlimited amount of shareholders.
S corporations, on the other hand, can have only up to 100 shareholders. Also, shareholders of an S corp must be United States citizens or residents.
And further, an S corporation can’t be owned by a C corporation, other S corporations, limited liability corporations (LLCs), partnerships, or most trusts. C corporations can be owned by other corporations, LLCs, or trusts.
Both S corps and C corps are structured with shareholders at the top.
But a main difference in shareholder rights between the two is this:
S corporations are limited to one class of stock, meaning that there is one kind of shareholder: There’s no hierarchy or difference between any one shareholder of the business. Shareholders of S corporations all have equal voting rights.
But C corps are a little different.
C corps can have different strata of shareholders at the top—mostly due to the fact that C corps can divide up their voting rights by issuing different classes of stock.
Put simply, the different classes of stock and voting rights mean that some shareholders’ votes count more than others’. Typically, a business’s early-on owners and founders have the most say when voting—and the most control over the business.
When it comes to the differences between S corps vs. C corps, taxation is the biggie.
If you choose to be an S corp, you’ll have a different way of being taxed.
The IRS treats a C corp as a separate taxable entity. A C corp is taxed at the corporate level, and they file a corporate tax return (Form 1120). A C corp can then be taxed once again at the personal income tax level if corporate income and payments are distributed to the corporation’s shareholders.
All this means is that a C corp is subject to “double taxation.”
Paying taxes as an S corp is a little different. As an S corp, the income and losses of the business are divided among the shareholders and are taxed only at the personal income tax level—they aren’t subject to the corporate tax. As a shareholder of a S corp, your business’s income is taxed on your personal income when you file Form 1120S.
This is why an S corp is subject to a “pass through” tax.
Now that you know the three major differences between an S corp vs. C corp, how can you decide between the two business entities?
Well, a lot of the benefits and disadvantages of both entities lie in those three differences we just outlined.
Let’s run through why should (or shouldn’t) choose one of these business entities.
When it comes to choosing an S corp vs. C corp, what might make you sway the way of a C corp?
Here are five distinct advantages of structuring your business as a C corp:
While those five benefits make a C corporation ideal for growing, larger business dealing overseas, here are two disadvantages to consider.
When it comes down to it, bigger companies benefit from having unlimited growth potential under a C corp but will pay a little more in taxes and spend a little more effort complying with more regulation.
To help you with your S corp vs. C corp decision, let’s run through the advantages and disadvantages of incorporating as an S corp.
Here are five advantages of an S corp to consider.
Here are three disadvantages to weigh against those five general advantages of structuring as a S corp:
When it comes to structuring as an S corp vs. C corp, the bottom line is really this:
If you’re starting a business that you plan on keeping fairly small, with fewer than 100 shareholders and totally in the United States, you probably want to be an S corp. You’ll have the benefits of limited liability and perpetual existence, but you won’t have to worry about paying more due to the double taxation effect.
On the other hand, if you’re starting a business with a big future, you’ll be better off with the flexibility to take on investors, raise capital, issue different kinds of stock, and invite foreign investors into your business as a C corp.
Because S corps and C corps share a lot of the same advantages and disadvantages, the decision between S corp vs. C corp comes down to the plans you have for your business.
Thinking big—really big? Go C corp and stomach the double-taxation effect. If you have smaller plans, an S corp might be a better fit.
So, you’ve considered your pros and cons list for S corp vs. C corp structures and have decided to go with a C corporation.
Here’s how you take the next step and formally structure your business as a C corp:
Follow those six steps, and you’re on your way to operating your C corporation.
Say that, in the debate between S corp vs. C corp, you went S corporation.
How can you set up your S corporation and get the ball rolling?
Because an S corporation is just a tax election from a C corporation, it’s actually almost the exact same process as setting up a C corp.
As you can see, becoming an S corp just takes one more step beyond being a C corp. Remember, though, that remaining an S corp depends on your ability to keep up with the appropriate tax documents that specify your business as an S corp. If you mess up your filing requirements, you risk losing your S corp status and becoming a C corp.
Now that you know the exact differences of an S corp vs. C corp, plus their advantages and disadvantages, you’re well equipped to make a smart choice for your business.
But remember, the way you structure your business is a big decision and has big implications on your business’s future. If you don’t feel sure about choosing your business entity or correctly structuring your company, consider talking to a small business lawyer or accountant.
This stuff is complicated and time consuming, but you want to get your business off on the right foot!