Some entrepreneurs arrive at a place in business when they want to establish or change their present business entity into a corporation. The two primary types of corporations available to entrepreneurs are an S corporation and a C corporation. Both types of corporations offer advantages and disadvantages. Understanding the similarities and differences between the two types of corporations can help you choose the corporate structure best suited for your business.
Personal Liability Protection
One similarity between S corporations and C corporations is they both offer personal liability protection to owners. State law prevents creditors from suing shareholders in an effort to collect money on business debts. Unlike with partnerships and sole proprietorships, a creditor cannot seek the personal assets of shareholders in S and C corporations. Creditors seeking payment for debt obligations may file a court judgment against the corporation to seek business assets. Although owners are not personally responsible for business debts, they are at risk of losing their own investments if the company enters into financial trouble.
S corporations and C corporations possess similar business structures. Individuals desiring to form either type of corporation must file articles of incorporation or a certificate of incorporation form with their secretary of state. S corporations and C corporations have directors, shareholders and officers. The shareholders of the corporations are granted ownership rights according to their percentage of shares held. Corporate directors govern the corporations by creating policies, making important business decisions and hiring officers. The officers of a corporation oversee daily tasks. Examples of officers within a corporation include the chief executive officer (CEO), the chief operating officer (COO) and the chief financial officer (CFO).
The primary difference between S corporations and C corporations is the Internal Revenue Service’s rules on taxation. S corporations do not pay corporate taxes, but the owners must pay personal income taxes on the profits. When an S corporation records a quarterly profit or loss, the amount is passed though to the shareholders. The shareholders must pay taxes on the profit by filing Form 1120S with the IRS. In contrast, a C corporation is required to pay corporate taxes by filing Form 1120. When a company pays its shareholders dividends out of corporate profits, shareholders must pay taxes on the dividends. This is called double taxation.
According the Internal Revenue Service, an S corporation cannot have more than 100 shareholders. An S corporation also is restricted to issuing only one class of stock. An S corporation must have shareholders that are individual investors who are U.S. citizens and not business entities. C corporations can issue an unlimited number and several classes of shares A C corporation can have shareholders who are individual investors and business entities. Investors are not limited to U.S. citizens.
- Jupiterimages/BananaStock/Getty Images