Acacia Business Solutions


S Corporation versus. C Corporation

There are three main differences when it comes to S Corporations and C Corporations: formation, taxation, and ownership.

  • Formation— C Corporations are considered the general type of corporation. When corporate articles are filed with a State, it is designated a C corporation, by default. If you want your corporation to be a S Corporation, you’ll must file Form 2553, with the IRS. You may need to file annual forms to stay a S corporation. Acacia Business Solutions can assist you in filing your Form 2553.
  • Taxation— C Corporations get taxed twice and files a 1120 form: The 2017 tax reform act lowered the corporate tax rate to a flat 21% and eliminated the alternative minimum tax. However, a C Corporations pays corporate income tax, and the shareholders pay federal income taxes based on annual dividends they receive. On the other hand, a S Corporations has pass-through taxation, and files an 1120s form. S corporation pass-through is like a Limited Liability Company, (LLC). When shareholders receive the pass-through income, it is reported as business income or loss on the shareholders 1040 tax return. So, the only tax liability shareholder pays are on their personal tax return. With a S Corporation there is no corporate tax. Because there is only a single layer of taxation. All distribution of income pass-through to the shareholders and it is only taxed at the individual level.

The Tax Cuts and Jobs Act of 2017 gave eligible S Corporation’s shareholders a deduction of up to 20% of net “qualified business income”. The losses of an S Corporations pass-through to its shareholders, who can use those losses to offset income, on their personal tax returns, of course subject to restrictions of the Internal Revenue Code.

  • Ownership— C Corporations can be owned by anyone citizen or non-citizen, there are no restrictions to ownership regarding a C Corporation, generally, anyone and any number of individuals or entities can be owners of a C Corporation. However, the IRS limits who can be owners of a S Corporation to individual US citizens, (there are some exceptions, LLC, Trusts, and Partnerships). S Corporations can only have one (1) class of stock, preferred stock is not allowed, and S Corporations are limited to 100 shareholders.

The Qualities Shared by C Corporations and S Corporations

Both C Corporations and S Corporations share five primary characteristic and qualities, as follows.

  • shareholders are generally not held personally liable for business debts and liabilities; whether it is taxed as a C corporation or an S corporation.
  • C Corporations and S Corporations are separate legal entities created by filing Articles of Incorporation with a state.
  • Organizing documents are filed with a State, called Articles of Incorporation or Certificate of Incorporation, are equal whether taxed as an S corporation or C corporation.
  • S corporations and C corporations have shareholders, directors, and officers. The Corporation owns the business, and the shareholders are the owners of the corporation. Shareholders elect the board of directors. The board oversees and directs corporation business, affairs and decision-making but is not responsible for day-to-day operations. The board elects the officers to manage daily business affairs.
  • State corporation laws make no distinction between C corporations and S corporations when it comes to compliance. All corporations are required to follow the internal and external corporate formalities and obligations, such as adopting bylaws, issuing stock, holding shareholder and director meetings, maintaining a registered agent and registered office, filing annual reports, and paying annual fees.

Tax laws are complex. And consulting with tax advisors will help you make the best decision as to how your corporation should be taxed, both at the time of incorporation and on an ongoing basis.

Acacia Business Solutions offers a wide range of corporate services and consultation, we are not a CPA or Law Firm and therefore we do not offer legal or tax advice.

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