Difference between S Corporation and C Corporation

When it comes to business, corporations are classified into two types namely S Corporation and C Corporation.

Their main differences involve both federal and state taxation, benefits to employees, capital, stocks, business activities, fiscal year, size of the corporation, and methods used in accounting.

There is a misconception among people about the formation of an S Corporation. Many people thought that an S Corporation election is being held at the time that the corporation itself is formed. This is not how an S corporation is formed.

A C corporation is like the default type of corporation because whenever a corporation is formed, it is automatically considered as C Corporation. It will remain as a C Corporation unless you file an S Corporation election with the IRS. Filing for an S Corporation also involves several things; this includes the approval of all the shareholders. A form must be completed and submitted to the IRS to request for an S corporation election. Form 2533 is filled out and submitted to the IRS in accordance with the Internal Revenue Code.

There is no specific time to file for an S corporation election request because a corporation can file anytime, this could be immediately after the corporation is formed or years after.

In the United States, there are cases that a corporation must file another S Corporation election in a state. And that state may not honor the same S corporation tax exemptions. It is also important to know that an S Corporation can covert back to C Corporation. It just has to file a request with the IRS. While C Corporation needs to keep its December 31 fiscal year and needs to wait for five years to be able to convert to an S Corporation again.

When it comes to federal taxation, S Corporation has an advantage over C Corporation. Shareholders of a C Corporation still need to file their dividends as income on their tax return even if the corporation has paid for that dividend’s corporate taxes. This is called “double taxation”, which is not present in an S Corporation.

In an S Corporation, shareholders file a K-1 tax return so that the corporation will not pay for an income tax. As an alternative, the share of each shareholder including the owners should be included on their own personal tax returns.

There is also a difference when it comes to employee benefits between an S corporation and a C corporation. In an S corporation, shareholders with more than 2% share of the corporation are not entitled to some tax-free benefits.

Remember that an S Corporation can covert back to C Corporation anytime just by filing a request with the IRS. But when it is already converted back to C Corporation, it must keep the December 31 fiscal year and cannot covert back to S Corporation in the next five years. Forming a new corporation is sometime better than waiting for those five years to save taxes.


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