The basic difference between a C-Corporation and an S-Corporation is the way you pay taxes. Both options have benefits and drawbacks. Keep reading for more information, or feel free to contact us!
Corporations need to have owners. "Publicly traded" corporations are ones who have stock listed on a public stock exchange (for example, McDonalds is a publicly traded corporation on the New York Stock Exchange). "Privately owned" corporations are ones that have closed ownership, like Pacific Corporate Filings. Just because a corporation is privately owned doesn't mean it can't be bought or sold; it just means it isn't traded on a public stock exchange. Either way, the corporation has to have owners. In the case of a publicly traded company, there might be thousands or millions of owners, some of whom only own a few shares of stock. In the case of a privately owned corporation, there may only be a handful of owners.
Either way, owners often receive a share of the profits. For a publicly traded company, this usually takes the form of "stock dividends." For privately owned corporations, it can take the form of dividends, profit sharing, or some other model. (Note that you have to have something set up; if you're a one-man corporation and all the profits go straight into your personal bank account, the state may not be convinced that you're really a corporation. See our Disclaimer.)
This is where the difference comes in. Normal C-Corporations are "taxed twice." When a C-Corporation makes a profit, it has to pay income tax. Then it gives a share of its profits to its owners, and they also have to pay income tax. By contrast, S-Corporations are only taxed once. The corporation itself essentially doesn't pay taxes, but the individual owners are still responsible to pay taxes on the income they receive from the corporation.
S-Corporation advantages
The advantages are obvious: your corporation will pay less in taxes. This is especially useful for smaller corporations that are really business partnerships, where a few people are personally involved in making the company succeed. The profits flow straight to them, and the operating cost for the corporation itself is lower.
S-Corporation disadvantages
In a C-Corporation, the company can keep all of the profits if it wants. In an S-Corporation, the profit automatically flows to the owners. BUT--so does the debt. If your corporation operates at a loss, then you might be personally liable for the debt incurred by your corporation. This pokes a hole in the "corporate veil." Thus, an S-Corporation doesn't just open up tax liability for owners, it also opens up some legal liability as well.
Comparison chart
C-Corporation
S-Corporation
Corp pays income tax
Yes
No
Individual tax liability
Maybe
Yes
Individual debt liability
No*
Yes
Limits on shareholders
No
Yes
Limits on stock
No
Yes
What PCF can do for you
PCF can help you form a C-Corporation or an S-Corporation anywhere in the United States. If you've already formed a C-Corporation and want to turn your company into an S-Corporation (this is called "Election"), we can help with that too.
*Normally speaking, individuals are not liable for corporate debt in a ((C-Corporation)). If you have personal debt, you're still liable for that.
Note: the information on this page is for information purposes only. If you need legal advice, see a lawyer. If you need tax advice, see an accountant. Also see our Disclaimer.
