S-Corporation vs. C-Corporation: What’s the Difference?

A C-corporation, or C-corp, is a legal business entity that shareholders own. Those shareholders elect a board of directors, who in turn choose a management team. Major corporations that issue shares of stock via the New York Stock Exchange (NYSE) and the NASDAQ are C-corporations, but privately held small businesses can also be C-corporations.

The Internal Revenue Service (IRS) taxes a C-corp for its business income, meaning its owners must also pay personal income tax on money earned from stock dividends. A business can avoid double taxation by organizing as a limited liability company (LLC) or by seeking S-corporation status, but it will be subject to other restrictions such as the number of shareholders it can have. A C-corporation also grants limited liability protection to its owners. If the company incurs debt or faces a lawsuit, the business owners are not held personally responsible, and their personal assets are not at risk. A lender or a litigant can go after the business itself—not its individual owners.

An S-corporation, or S-corp, is a business entity designated under Subchapter S of the Internal Revenue Service's internal revenue code. Sometimes referred to as a "small business corporation," it combines the protection of an LLC with the corporate-level status of a C-corp.

The IRS grants certain tax advantages to a business with S-corp status. The corporation does not pay federal income tax; rather, its profits pass through to the business owners, who report them on their personal income tax returns. A business with S-corporation status avoids paying double taxation on its corporate income. An S-corporation also grants limited liability to its owners.

If you aim to acquire many investors, have international partners, or engage in overseas sales, a C-corporation is the appropriate entity type for your business.

1. 1. Select a business name. Your C-corp will be a legal entity, and it must have a legal name registered with the government. Some companies have one legal name, but do business under another name. This is called a DBA, which stands for "doing business as."
2. 2. File articles of incorporation. To establish your business, you must submit articles of incorporation to your state's secretary of state. Expect to pay a filing fee. After you’ve filed successfully, the state will send you a certificate of incorporation.
3. 3. Obtain an Employer Identification Number and a bank account. The business will need an Employer ID Number (EIN) from the IRS. It will also need its own business bank account.
4. 4. Create an operating agreement. A business's operating agreement establishes laws and bylaws at the shareholder level. It names ownership stakes, can set limits on the number of shareholders, and sets rules for financial distributions.
5. 5. Name a registered agent for the business. A C-corporation is required to have a registered agent who accepts legal documents and tax documents on behalf of the company.
6. 6. Name a board of directors. A C-corporation must have a board of directors elected by the shareholders of the business. The board must conduct quarterly meetings and make minutes available to all owners.
7. 7. Issue stock certificates. C-corp owners are referred to as shareholders, and they should be given stock certificates signifying their ownership stake in the company.
8. 8. Apply for licenses and permits as necessary. Some C-corporations operate businesses that are regulated by state and local agencies. Obtain the appropriate permits and licenses before conducting business.

A small business owner should consider the myriad filing requirements before they elect S-corporation status.

1. 1. Select a business name. Your S-corp will be a legal entity, and it must have a legal name registered with the government. Some companies have one legal name, but do business under another name. This is called a DBA, which stands for "doing business as."
2. 2. Organize your business as an LLC or a C-corp. In order to elect S-corporation status, a business must begin as one of these two legal entities. File articles of incorporation with your state's secretary of state to establish your business.
3. 3. Obtain an Employer Identification Number and a bank account. The business will need an Employer Identification Number (EIN) from the IRS. It will also need its own business bank account.
4. 4. Create an operating agreement. A business's operating agreement establishes laws and bylaws at the shareholder level. It names ownership stakes, sets limits on the number of shareholders, and sets rules for financial distributions.
5. 5. Name a registered agent for the business. An S-corporation is required to have a registered agent who accepts legal documents and tax documents on behalf of the company. If you are the sole proprietor of your business, you would naturally serve as your S-corp's registered agent.
6. 6. Confirm your eligibility. To enjoy S-corp tax status, you must operate a US-based business owned by American citizens, be limited to 100 total shareholders, have no ownership from institutional investors, not be a bank or an insurance company, and not be an international sales corporation.
7. 7. Name a board of directors. An S-corporation must have a board of directors elected by the shareholders of the business. The board must conduct a minimum of one annual meeting and make minutes available to all owners.
8. 8. File the IRS Form 2553. Fill out and submit Form 2553, Election by a Small Business Corporation, to the IRS to establish S-corp tax status. If your business is an LLC that chooses to be taxed like an S-corp, you must file Form 1120-S with the IRS.

When making S-corp vs. C-corp comparisons, consider these differences.

1. 1. Taxation: An S-corp is a pass-through entity that does not pay corporate income tax. Instead of business taxes, its owners declare the income on their personal tax returns. A C-corp must pay taxes on its business income, and then its owners pay federal income tax on their corporate dividends. Owners of both business entities are advised to enlist a CPA to properly comply with current tax law.
2. 2. Membership: The internal revenue code caps S-corporation membership at 100 owners. A C-corporation can publicly issue stock certificates and take on an unlimited number of owners. All publicly traded corporations are C-corporations.
3. 3. Types of owners: The owners of an S-corp must be individuals, trusts, estates, or non-profits. Any entity type can invest in a C-corp, including institutional investors such as a mutual fund or a venture capital firm.
4. 4. Class of stock: An S-corporation can only issue one class of common stock. A C-corporation can issue multiple classes of stock, including Class A shares, Class B shares, common shares, and preferred shares.
5. 5. Nationality: An S-corporation must be domestically based, and its owners must be US citizens. A C-corporation can be based anywhere.
6. 6. Startup costs: In most states, incorporating is more burdensome and expensive for C-corporations than it is for S-corporations—particularly S-corps that start as an LLC and then switch for tax purposes.

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