Tax Treatment and Business Structure: S Corp vs C Corp
The choice between having an S corp or a C corp should be based on the specific situation of the owner and the business. Consulting with tax and legal professionals during the business formation process is recommended.
Tax Differences between C Corp and S Corp
- C corporations pay tax on their income at the corporate level, plus shareholders pay taxes on the profits distributed as dividends.
- S corporations file IRS Form 1120S that reports income and expenses to the IRS. Profits or losses flow through to the individual shareholders.
Benefits and Drawbacks of S Corp and C Corp
- Each type of corporation has its own benefits and drawbacks, as well as differences when it comes to taxes.
S Corp vs C Corp Summary
- S Corp does not pay income taxes directly.
- C Corp pays taxes on income, with shareholders paying taxes on dividends.
Ownership and Taxation
- An S corp can be owned by individuals who are U.S. citizens or permanent residents and certain trusts and estates, but not by business entities such as C corporations and partnerships.
- C corporations are taxed at the corporate level with double taxation, while S corporations have pass-through taxation.
Formation Process
- Whether S corp or C corp, the formation process for both is essentially identical.
Considering Your Business Structure
- Small owners often opt for S corp status to save on taxes.
- C corps may be better for startups planning to raise investor money or grow very large.
Deciding Between S Corp and C Corp
- Consult your accountant before deciding between an S corp or C corp to see which structure your business qualifies for.
Long-term Consequences
- Your incorporation status can have long-term consequences on your business. It is crucial to determine which structure will deliver the best solutions for your business today and tomorrow.