Tax Treatment of C Corp and S Corp
The main difference between a C corp and S corp is how they are treated for tax purposes. C corporations pay tax on income at the corporate level, plus shareholders pay taxes on distributed dividends. S corporations don’t pay income taxes directly. Profits or losses flow through to shareholders.
Ownership Restrictions and Tax Implications
S-Corps have pass-through taxation as long as the corporation does not have over 100 shareholders. An S-Corp has restrictions on shareholders: no foreign entities or people.
Stock Options Limitation
Another difference between S corps and C corps is their stock options. S corporations are restricted to only one class of stock, ensuring that all shareholders have equal rights to distributions and liquidation proceeds. This limitation can impact the corporation’s ability to raise capital and attract investors.
Conclusion
The S Corp and C Corp identifiers relate to tax categories available to corporations. S Corp and C Corp are named after sections of the Internal Revenue Code that regulate their taxation procedures. Under IRS standards, a company is categorized as a C Corporation by default. Companies under S Corporation have adopted special tax status, allowing them some tax advantages. The decision between C Corp and S Corp classification for a company can significantly impact its future, growth, and investor base.