C Corporation vs. S Corporation

Below are the general differences between the two corporate tax structures

 

How is a corporation taxed?

 

C-Corporation

     At the federal level

In forming a corporation, prospective shareholders transfer money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to compute its taxable income. A corporation can also take special deductions.  The profit of a corporation is taxed twice because shareholders are taxed on their distributed dividends. However, shareholders cannot deduct any loss of the corporation.

     At the state level

Depending upon the state, your corporation may be required to pay an annual tax or franchise tax. In addition, the corporation may be required to pay the minimum tax every year for the life of the corporation. Since each state is different, we recommend that you speak to your accountant or tax preparer for specific tax questions.

 

S-Corporation

      At the federal level

An eligible domestic corporation can avoid double taxation by electing to be treated as an S corporation. Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income.  On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss.

     At the state level

Depending upon the state, most S corporations have to pay the same annual tax or franchise tax as C Corporations. In addition, the corporation may be required to pay the minimum tax every year for the life of the corporation. Since each state is different, we recommend that you speak to your accountant or tax preparer for specific tax questions. 

 

Should I form an LLC or Corporation?

Corporations and LLCs are both excellent choices for business owners looking to minimize their personal liability and build greater credibility. But each entity also offers distinct tax and business advantages. Choosing the right one depends on the specific needs of your business. The type of industry that you are in may dictate the type of entity that can be formed.  If you are not sure, contact a CPA or an attorney.

 

Corporations offer personal liability protection, tax savings, and increased opportunities for raising capital. Corporations are also required to perform certain formalities, such as holding annual meetings and keeping detailed corporate records (minutes). 

 

Limited Liability Companies (LLCs) offer the same personal liability protection as a corporation, but with fewer of the corporate formalities. They typically are not required to hold formal meetings or keep detailed corporate minutes. LLCs also offer great tax flexibility. Members can choose to be taxed as either a traditional corporation or as a "pass-through" entity.