C-Corp vs S-Corp
Start your companyWhat is the difference between a C-Corp vs S-Corp?
C-Corp and S-Corps are both corporations. They provide the same liability protection and have the same formal corporate requirements. However, there is a big difference when it comes to C-Corp vs S-Corp taxes. C-Corps pay corporate taxes on earnings while S-Corps are pass-through entities that do not pay taxes at the corporate level. As such, there is an S-Corp vs C-Corp tax benefit.
C-Corp and S-Corps are both corporations. They provide the same liability protection and have the same formal corporate requirements. However, there is a big difference when it comes to C-Corp vs S-Corp taxes. C-Corps pay corporate taxes on earnings while S-Corps are pass-through entities that do not pay taxes at the corporate level. As such, there is an S-Corp vs C-Corp tax benefit.
C-Corp
C-Corps are the best entity type for companies with owners who seek:
Ability to raise capital
Positive public perception
Business credibility
Strict corporate formalities
S-Corp
S-Corps are the best entity type for companies with owners who seek:
Pass-through taxation
Employee equity incentives
Business credibility
Strict corporate formalities
Benefits of C-Corp vs S-Corp
Liability protection
Tax advantages
Raising capital
Tax planning options
Public perception
Business loans
Benefits & Advantages
Liability protection
Tax advantages
Employee equity incentives
Tax planning options
Public perception
Business loans
C-Corps are the right entity for:
Companies raising capital
The ability to issue unlimited shares to investors is an important consideration in the S-Corp vs C-Corp decision. The ability to offer unlimited shares to investors makes a C-Corp an attractive option for startup founders seeking to raise capital. Since most startups are not profitable for many years, the double taxation of a C-Corp should not necessarily increase a founder’s tax liability. However, if this is a concern, the shareholders can elect to be taxed as a pass-through S-Corp.
Companies joining incubators & accelerators
Sophisticated investors that participate in incubator and accelerator programs prefer to invest in C-Corps because they offer investors simplified taxation and corporate formalities that protect their investment. Understanding the benefits of C-Corp vs S-Corp is essential in this context. Since one of the big advantages of joining an incubator or accelerator is the access to a pool of investors and advisors, if you plan on joining such a program, you should consider forming a C-Corp.
Subsidiaries of foreign companies
C-Corps pay a reduced corporate income tax rate on company profits. If you are forming a subsidiary in the US, you may want to keep US profits separate from foreign income. In such a case, understanding the advantages of C-Corp vs S-Corp is important, as the corporate taxes levied on a C-Corp may be beneficial over the pass-through taxation of other entity types.
S-Corps are the right entity for:
Companies owned by US residents
Only US citizens and residents owners can elect to be taxed as an S-Corp. For these individuals, there are S-Corp vs C-Corp tax benefits, including pass-through taxation and savings on self-employment taxes. In addition, since S-Corps are corporations, they can issue stock and stock options to incentivize employee performance.
Businesses with US Employees
If your business requires employing US residents, considering S-Corp vs C-Corp is crucial. An S-Corp can provide you with both tax savings and employee performance incentives. By adding the owners to the existing payroll for other employees, the owners can save on self-employment taxes levied on dividends. Also, an S-Corp can issue employee incentives in the form of stock or stock options in the company.
Bootstrapped Startups
Unless you are raising money from investors, who generally prefer C-Corps, an S-Corp will provide you with all advantages of a corporation, including liability protection, public perception, and ability to issue stock and stock options to employees, without the need to pay additional corporate income taxes. Understanding the benefits of S-Corp vs C-Corp can help you make an informed decision for your business.
C-Corp
Pros
Liability protection > A C-Corp shields your personal assets from your company’s debts and legal liabilities.
Public perception > Most well-known companies are C-Corps. Owning a C-Corp tells the public that you are serious about scaling your business.
Raising capital > C-Corps have no limits on the amount of investors to whom they may issue shares. This is why C-Corps are the best entity type for raising capital.
Tax planning options > Owners of a C-Corp can elect S-Corp pass-through taxation which provides flexibility in tax planning and optimization.
Tax advantages > C-Corps pay reduced corporate income tax rates on company profits which can help you optimize on taxes in certain circumstances.
Business loans > A C-Corp allows you to build your business credit history which will provide access to business loans that will help your company grow.
Business credibility > When your business name has the designation “Inc.” at the end, it lets customers and partners know you are a credible business.
Cons
Double taxation > Unless it qualifies as an S-Corp, your C-Corp will pay income taxes on its profits and then shareholders will pay income taxes again on dividends issued.
Strict formalities > C-Corps are required to hold annual meetings, keep formal minutes of meetings, appoint a board of directors, and select officers.
S-Corp
Pros
Liability protection > An S-Corp shields your personal assets from your company’s debts and legal liabilities.
Public perception > Most well-known companies are corporations. Owning an S-Corp tells the public that you are serious about scaling your business.
Employee equity incentives > S-Corps allow their owners to issue stock and stock options to their employees without the double taxation of C-Corps.
Tax planning options > Owners of an S-Corp can elect C-Corp corporate taxation which provides flexibility in tax planning and optimization.
Tax advantages > S-Corps do not pay corporate income taxes and can help shareholders save on self-employment taxes.
Business loans > An S-Corp allows you to build your business credit history which will provide access to business loans that will help your company grow.
Business credibility > When your business name has the designation “Inc.” at the end, it lets customers and partners know you are a credible business.
Cons
Only for US residents > All owners of an S-Corp must be US residents or US citizens. If a single owner is a foreign resident, you cannot make an S-Corp election.
Strict formalities > S-Corps are required to hold annual meetings, keep formal minutes of meetings, appoint a board of directors, and select officers.