Both an S Corp and a C Corp are corporations taxed under a different subsection. A C Corporation is a standard corporation. Also, an S Corporation has a special tax status. When you register your business as a corporation, it changes how the business is taxed.
What Does an S Corp and C Corp Have in Common?
Whether you choose to classify your business as an S Corp or a C Corp, they have shared advantages:
- Protection from Personal Liability: You gain access to limited liability protection when you register your business as a corporation. This means that if someone comes after your business, your personal assets are not at stake. Your business is responsible, but you are not personally responsible.
- Business As a Separate Entity: A corporation is a separate legal entity from yourself and your personal finances. Once you file with the state as either a C Corp or an S Corp, you are separate from your business.
- Same Documents to File: You will go through the same process to classify your business as a corporation. The Certificate of Incorporation is the same for both a C Corp and an S Corp.
- Both Recognized As Corporations: You can structure your company in the same way for both types. You will have shareholders and a board of directors. In addition, you will follow standard corporate formalities, such as holding shareholder meetings and issuing stocks.
What Sets an S Corp and a C Corp Apart
So what is the difference between the two types of corporations? The answer is in the way the corporation is taxed. How do you want your taxes for your business to be calculated?
- S Corp: This pass-through taxation entity means that all of the profits and losses of your business are reported on the owner’s personal tax returns. And that number is the one that gets taxed.
- C Corp: With a C Corp, the owner of the business is paid a salary. You are then subject to double taxation. Corporate tax is paid first, and then the owner pays personal tax on what they take home as a dividend.
When you find out which corporation best fits your business model, you can get a clear picture of whether to register as an S Corp or a C Corp. There are limits to S Corps, like restricting shareholders to no more than 100 and only having one class of stock. It is important to learn which corporation is best for you.
If you have any questions regarding classifying your business, you can call on Shoup Legal for help. We are happy to talk about the tax benefits you can receive. Contact us at (951) 445-4114 or email [email protected] to learn more about available services.