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Perhaps you’re considering structuring your small business as a corporation, as opposed to other options like a partnership, limited liability company, or sole proprietorship. You may have noticed that there are multiple types of corporations (or corps, as they’re sometimes known). So what’s the difference between an S-corp and a C-corp?
Perhaps it’s first beneficial to consider all the ways the structures are similar. Both have owners who are referred to as shareholders. These shareholders elect individuals to serve in director roles, and directors are tasked with bringing in officers who handle the business’s regular operations.
There are certainly more hoops to jump through with S-corps and C-corps than with more streamlined structures like sole proprietorships or limited liability companies. These added tasks include drafting bylaws, holding director meetings, holding shareholder meetings, keeping a record of all your meetings (known as the meeting’s minutes), and sending out official resolutions whenever the business faces a big decision.
Both forms of corporations are known for the liability protection they offer to business owners. In the eyes of the law, your S-corp or C-corp is a separate entity from yourself. This means that, if things go south and your business were to incur major losses, only your business assets would be exposed to creditors. Your home, personal vehicles, real estate, and other possessions would be safe.
These similarities likely leave you wondering, “What’s the difference?” But there are some crucial distinctions between an S-corp and a C-corp. First up: the tax situation. C-corps, which happen to be the most popular form of corporations overall, report their taxes via a corporation tax return. And if shareholders earn profits in the form of dividends, the shareholders will be taxed again on the personal level.
S-corps, which are the preferred option for most small business owners, allow the business’s profits and losses to “pass through” to each shareholder’s personal tax return. The key benefit of this: shareholders would only be taxed once for profits at the personal level, rather than having them taxed at both the corporate and personal level.
You’ll also find that S-corps and C-corps differ when it comes to ownership. With an S-corp, you can’t exceed 100 shareholders, and each of these individuals must be an American citizen or resident. C-corps don’t have such regulations, allowing you to have more shareholders and draw from a larger pool of candidates.
Another distinction: S-corps are only able to have a single class of stock. This can be limiting—so some small business owners prefer C-corps, which can have a wider variety of stock classes.
One final distinction relates to employee benefits. C-corps can deduct the cost of health insurance, life insurance, and disability insurance from their taxes. If these benefits are available to 70% or more of the corporation’s total employees, the costs aren’t taxable to the shareholders.
S-corps don’t allow for this benefit. The benefits may not be deducted, so any shareholder who owns more than 2% of stock will instead find that the costs are taxable.
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California loans made pursuant to the California Financing Law, Division 9 (commencing with Section 22000) of the Finance Code. All such loans made through Lendio Partners, LLC, a wholly-owned subsidiary of Lendio, Inc. and a licensed finance lender/broker, California Financing Law License No. 60DBO-44694.