What is a C-Corp vs S-Corp?
What Are S Corporations and C Corporations?
In the United States, the Internal Revenue Service classifies small business corporations as either C corporations (C corps) or S corporations (S corps). An S corp is recognized as a pass-through entity for federal tax purposes, which can lead to various tax advantages. Additionally, an LLC has the option to elect S corp taxation.
Key Differences in Taxation
The primary distinction between S and C corps lies in their tax obligations under the Internal Revenue Code. A C corp submits its own income tax return and is taxed on its income at the federal corporate tax rate. By default, all corporations in the U.S. are taxed as C corps unless they opt for S corp status.
Single-member LLCs: By default, these are taxed as sole proprietors.
Multi-member LLCs: These are taxed as partnerships unless they choose to be taxed as S corps. Both single and multi-member LLC owners can make this election.
Liability Protection for Shareholders
Owners of an S corp, known as shareholders, receive the same limited liability protection as C corp shareholders. They also enjoy similar protections as LLC owners who elect S corp taxation. This means that shareholders’ personal assets—such as homes and bank accounts—are generally protected from being seized to cover business liabilities.
Tax Benefits of S Corporations
Similar to sole proprietorships or partnerships, S corps pass most of their income, losses, and deductions directly to the shareholders. This setup allows shareholders to avoid double taxation, which occurs at the corporate level and again at the individual level on personal income taxes. Each shareholder is taxed at their individual tax rate on the income or losses passed through to them. Our office can effectively address any legal questions about corporations. If you have any questions, please fill out the following form below and a Business Lawyer from our office will get back to you.
