S Corp vs C Corp: Make The Right Selection
One of the questions we receive during initial consultation stage is, “I want to form a corporation, what is the difference between S Corp vs C Corp ?”
S Corp vs C Corp: What Is The Difference?
The actual corporation itself, there is no differentiation. You incorporate a corporation and you have a corporate body. The S Corp vs C Corp status is actually a tax based status.
C Corporation is a traditional status which you get by default and the profit leftover at the end of the year is taxed and any distributions or dividends to shareholders are also taxed.
An S Corporation status allows a corporation to operate essentially like a partnership or a limited liability company (LLC). Profit or loss is not taxed at the corporate level, rather it passes through to the individual owners or partners.
There are some limitations with S Corporations:
- The shareholders need to be individuals.
- They need to be US persons. There are some trusts that can be shareholders, but it’s primarily just US people with a green card or a citizenship.
- There’s a maximum of a hundred (100) shareholders that are permitted under the S corporation status.
- Shareholders who have different financial interests. They have rights to more money or less money, preferred stock or a venture capital deal, they can no longer be an S Corporation.
Which Corporation Status Should I Choose? S or C?
When choosing to be an S Corp vs C Corp, you always need speak with their CPAs or tax accountants. They will be able to figure out the best structure for the particular business.
Just because you read something online or you have a friend who has an S Corp vs C Corp, doesn’t necessarily mean that’s the appropriate structure for you. This should be a joint decision between your business attorney and a CPA or a tax advisor.
Making the decision as to if you’re going to be an S Corporation or a C Corporation is usually done at the formation stage. You will make the election within the first seventy five (75) days of formation of the corporation. There are late elections, but the recommendation is that people make the timely election.
Why Is It Important To Choose Your Corporation Status Right Away?
Select the correct corporation status upfront and set the stage for how you are taxed going forward. You should make the S selection within the first seventy five (75) days of formation. If you miss that deadline, there is a procedure under the IRS code to request a late election. This becomes much more complicated if you’ve filed tax returns already.
To convert from a C Corporation to an S Corporation once you’ve filed returns will add layers of complication and extra financial expenses. You will be working not only with your lawyers, but also with your tax accountants as well.