Choosing the proper corporate structure for your business is a decision that shouldn’t be taken lightly. Two such structures are S corporations and C corporations. They have different legal requirements, tax implications, and operating procedures that you must consider before deciding which is best for your company.
In this article, we will take a closer look at the differences between S Corp and C Corp and discuss how Wise Business can help you save while running your business.
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What is an S Corporation (S Corp)?
An S Corporation is a type of corporation created under US tax law. It allows certain businesses to benefit from the limited liability protection of a corporation. They are also able to take advantage of pass-through taxation. This is similar to that of a partnership or sole proprietorship.
Pass-through taxation means that profits and losses are passed through directly to shareholders rather than being taxed at corporate levels. This makes the S corporation structure an attractive option for many small business owners who want to avoid double taxation.
For your company to qualify as an S Corp, you must meet several requirements. The main requirement is that you are a domestic corporation. This is because status is granted through the Internal Revenue Service (IRS), which is a branch of the US government.
Other requirements include having no more than 100 shareholders and only one class of stock, among others. Having one class of stock means that all shareholders have the same rights and privileges. Some corporations also can’t apply for S Corp status, such as certain financial institutions and insurance companies.²
Additionally, you must file a special form with the IRS to elect S Corp status. This form is called Form 2553, Election by a Small Business Corporation, and must be signed by all shareholders.³
What is a C Corporation (C Corp)?
A C Corporation is a standard corporation that’s established under state law. It offers the same limited liability protection as an S Corp. However, unlike an S Corp, a C Corp also allows for unlimited shareholders and different classes of stock. This means that one individual or group of individuals can have voting rights and different levels of ownership.
C Corps are subject to double taxation. This means that profits are taxed at both corporate and personal levels. This makes it less attractive to small business owners who would rather avoid this additional burden. On the other hand, C corps may be able to take advantage of certain deductions or credits. These can offset some of these taxes in certain situations.
For your company to qualify as a C Corp you must meet all the same requirements as an S Corp. However, you do not have to file any additional paperwork with the IRS. This is one of the main C Corp benefits.
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S Corp vs. C Corp: Similarities and Differences
The main similarities between S Corps and C Corps are that they both
- offer limited liability protection, meaning the owners of the company are not personally liable for business debts
- have the same legal requirements for formation, including filing certain documents with the state, registering a business name, and creating corporate bylaws
- need to be filed with the state to obtain certain legal protections
The main difference between S Corp and C Corp attributes has to do with how their profits are taxed. We’ll go into more depth about that below.
S Corp vs. C Corp Tax
As previously mentioned, S Corps avoid double taxation by passing through profits and losses directly to shareholders. This means that the corporation does not pay taxes and shareholders are taxed according to their percentage of ownership.
On the other hand, C corps are subject to double taxation. This is because they must pay taxes on corporate income before distributing any money to shareholders.
Additionally, S Corps may only have a certain number of shareholders while C Corps can have an unlimited number of them. S Corps can also only issue one class of stock while C Corps can have multiple classes.
Here’s a table to help you understand the key differences.
| S Corp | C Corp |
|---|---|
| Pass-through taxation | Can take advantage of certain deductions or credits |
| No double taxation | Double taxation |
| Limited to 100 shareholders² | Unlimited shareholders |
| One class of stock | Different classes of stock |
| Must file a special form with the IRS (Form 2553)³ | No additional paperwork required |
There are some similarities when it comes to taxation as well. Both C Corps and S Corps can be liable for:
- Income tax
- Employment taxes
- Social Security & Medicare taxes
- Income tax withholding
- Federal unemployment (FUTA) tax
- Excise taxes²
You can learn more about all of these potential taxes and the forms you need through the IRS website.⁴
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Need a Business Account for your S Corp or C Corp? Try Wise Business
Now that you have a better idea of the similarities and differences between S Corps and C Corps, you’re hopefully closer to making an informed decision. But what’s the next step? For small businesses, proprietors, or LLCs, Wise Business is the perfect place to keep your funds organized as you take this leap.
| Some key features of Wise Business include: |
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| Better visibility and organization of business finances. This is helpful for account reconciliations and audits. |
| Administration controls for users. It’s possible to allow team members to carry out specific tasks. |
| Receive payments from ecommerce platforms (such as Amazon or Stripe) |
| Create invoices using the Wise invoice generator or invoice templates. |
| Features for bill payment, including a QuickBooks Bill Pay connection. Bill payments will be synced, matched, and categorized in QuickBooks for simple reconciliation. |
| Batch payment options. This allows the fast payment of up to 1,000 people, by uploading a spreadsheet. |
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Moreover, we've got a US business debit card that can help sole proprietors make withdrawals and payments while they're on the move.
The Wise account’s main advantage is that we make it easy to accept and send payments abroad. You can make international payments to over 70 countries in over 40 currencies. So no matter where your employees are working from, you can pay them quickly and easily without high markups.
S Corp vs. C Corp: Frequently Asked Questions
S Corp vs. C Corp vs. Partnership: What’s the Difference?
A C corporation is a business structure that is taxed separately from its owners. This type of entity offers limited liability protection to shareholders. This means that their assets are not at risk if the company falls into financial trouble.
An S corporation reduces the amount of taxes a business owner pays by allowing income and losses to be passed through to shareholders. These shareholders then report them on their tax returns.
A partnership is a business structure in which two or more people share ownership of the venture. These multiple owners are liable for any debts or obligations incurred by it.
S Corp vs. C Corp vs. LLC: What’s the Difference?
A limited liability company (LLC) is a business structure that provides its owners with the same limited liability protection as a C Corporation. An LLC also offers flexibility in how it is managed and taxed.
An S Corp, on the other hand, is a special type of corporation that offers certain tax advantages not available with other business structures. To take advantage of these S Corp benefits, the company must meet specific criteria set by the Internal Revenue Service (IRS).
While they are very similar, the main difference between an LLC and a C Corp is the way they are taxed. In most cases, an LLC’s profits and losses are “passed through” to its members. These members then report them on their tax returns. S Corps work in the same way.
On the other hand, C Corporations have double taxation. This means that their profits are first taxed at the corporate level and then again at the shareholder level.
What is C Corporation on W9?
C Corporation on W-9 refers to the status of a company that has elected to be taxed as a C Corporation by the Internal Revenue Service (IRS).
The IRS requires companies to submit Form W-9 when they are hired for work or services.⁵ This form includes information about whether the company is an S Corp or C Corp. This information is then used by tax professionals to ensure that taxes are calculated correctly.
You should include your S Corp or C Corp status on a W-9 Form because the taxation for C and S Corps is very different. For example, C Corps are subject to double taxation. This means that the company will pay taxes on its profits and then shareholders must also pay their taxes on dividends paid out by the company. S Corps avoid double taxation because they pay their taxes at the shareholder level.
Is an S Corp a Pass-Through Entity?
Yes, an S corporation is a pass-through entity. Being designated a pass-through entity means that income and losses are passed through to the shareholders. The shareholders then report them on their tax returns. The business itself pays no taxes and does not file a return with the IRS.
Some people prefer that their business is a pass-through entity because it allows them to pay fewer taxes. The downside is that the business has limited growth potential. This is because profits are passed through to shareholders and not reinvested into the company.
Can an S Corp Own Another S Corp?
Yes, an S Corp can own another S Corp. This type of structure is known as a “holding company”. It allows businesses to easily manage their subsidiaries without paying additional taxes on the income generated by the subsidiary.
This is helpful because it allows businesses to keep their taxes low and simplify their organizational structure. The downside to holding companies is that they can be complex to set up and maintain. As such, many businesses choose not to use them. However, you must think about what works best for you and your business structure.
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What is an Example of an S Corporation?
Picture a small business that manufactures and sells furniture. The owners are two brothers, John and Charles. They started the business in their hometown. They have two employees who help with production and sales. As shareholders of the company, each brother holds 50% ownership in the company.
Since they are both taxed on any income or losses generated by the business, they decide to form an S corporation to save money on taxes. This business qualifies as an S Corp because
- It has fewer than 100 shareholders
- All the shareholders are individuals who are US citizens or residents
- The company is not a financial institution, insurance company, or domestic international sales corporation (DISC)
What is an Example of a C Corporation?
Picture a large business that produces and sells electronics. The company has multiple locations globally. It employs hundreds of thousands of people. The ownership is divided among over one hundred shareholders around the world. Some of these shareholders only own a fraction of a percentage of the company's stock.
Since C Corps are taxed separately from their owners, this business structure would be ideal for this type of business. The C Corp structure would allow them to pay corporate taxes rather than individual taxes on profits generated by the corporation.
This business qualifies for C Corp status because
- It has more than 100 shareholders
- The shareholders are not all US citizens or residents
- The company is not a financial institution, insurance company, or domestic international sales corporation (DISC)
What’s the Difference Between Form 1120 vs. Form 1120-S?
Form 1120 is the US corporate income tax return for C corporations. Form 1120-S, on the other hand, is the US income tax return for S corporations.
When filing a Form 1120, C corporations pay taxes on their income. Shareholders are taxed separately when they receive dividends or other distributions from the company’s profits. You can learn more about Form 1120 on the IRS website.⁶
With an S corp, all of the company’s taxable income is split between its owners. This income is reported on their returns as “pass-through” income, which can be subject to different taxation rates. Therefore you need a different form - Form 1120-S. You can learn more about Form 1120-S on the IRS website.⁷
What Does it Mean to be a Shareholder in an S Corp?
A shareholder in an S corp is an individual or entity that owns shares of the company. Shareholders are typically entitled to a portion of the profits and losses. They are also usually entitled to any dividends paid out by the corporation.
Additionally, shareholders may have voting rights and/or other privileges. However, this depends on how many shares they own. They also have limited liability protection from any debts or obligations incurred by it.
Being a shareholder is usually a positive thing. It means that you have partial ownership of the company, You are also entitled to some of its profits or losses. Additionally, it gives you certain privileges. This includes voting rights and access to dividends. These are powerful advantages that can benefit you in the long run.
Wise Business Helps You Do Business Overseas
Wise Business has accounts that are ideal for US small businesses in so many ways. The main way we can help is through our reduced fees.
Small businesses work tirelessly to stay afloat and part of that is because of a limited amount of funds. At Wise, we recognize that and want to help. A small business in the US can get started today with Wise Business at no cost to them. There are also no load requirements and minimal, transparent fees.
Sole proprietors in the US also have access to our Wise Business debit card. This card is easy to use for payments and withdrawing funds wherever you are.
And speaking of travel, we also make it easy to transfer funds overseas. You can send and hold money in over 40 currencies. This makes it easy to expand your small business beyond your storefront or the US
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Sources:
- https://www.trustpilot.com/review/wise.com
- https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
- https://www.irs.gov/forms-pubs/about-form-2553
- https://www.irs.gov/businesses/small-businesses-self-employed/forming-a-corporation
- https://www.irs.gov/forms-pubs/about-form-w-9
- https://www.irs.gov/forms-pubs/about-form-1120
- https://www.irs.gov/forms-pubs/about-form-1120-s
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