When a company is formed, its founders have to make a number of important decisions. One of the most important of these is the type of organization they want to be. Options include sole proprietorships and partnerships, limited liability companies and corporations. For those that choose to form as a corporation, there is yet another decision to be made: whether to form as an S-Corporation or a C corporation. While both types of corporations offer the advantage of avoiding personal liability, each has its own rules and advantages, and each is treated differently from a tax perspective.

One of the biggest tax differences between a C-Corporation and an S-Corporation lies in the way their taxes are paid. Where a C-Corporation files a standalone tax return and pays at a corporate rate, S-Corporation returns are filed as part of the individual income tax return via a K-1 form and are taxed at the individual rate. Another significant difference lies in the fact that a C-Corporation is required to submit quarterly estimated tax payments to the federal government based on their corporate rate, while the S-Corporation does not (though the S-Corporation may have to pay state quarterly estimated taxes).

Most important of all, in addition to being required to pay a corporate tax, when a C-Corporation makes distributions to its shareholders, the distribution is then taxed at the individual’s personal rate: this results in a level of double taxation. By contrast, an S corporation’s gains (or losses) are divided between its shareholders, and then each of them pays at their own individual level and can deduct losses at an individual level. C Corp owners are not able to write off their losses from their personal income.

Beyond taxes, there are certain advantages to C-Corporations that are not extended to shareholders in S corporations. C-Corporations can have as many shareholders as they’d like, with a hierarchy between different stock owners, where S-Corporations are limited to only 100 shareholders and can only have one kind of shareholder, all of whom have equal voting rights. C-Corporations also have the advantage of being able to deduct the cost of benefits like health insurance and disability insurance if they are extended to 70 percent of the employees.

With so many key differences, the decision between an S-Corporation and a C-Corporation is one you should not make alone. To set up an appointment to discuss what is best for you, contact our office today.