What does S Corp and C Corp Mean?
By Nadia Cabrera-Mazzeo
Short Answer: S corps have pass-through taxation and some structural limits; C corps are subject to double taxation and can grow bigger in some ways.
C corporations
In a C corporation, business income is taxed at the corporate level and then taxed again when shareholders (owners) receive dividends. This is referred to as double taxation, which can be very unfavorable for small businesses but makes financial sense in certain situations. C corps are allowed to have an unlimited number of shareholders and are allowed to issue different classes of stock (which means not all shareholders have the same rights and authority over the corporation). Any person or business entity is allowed to own shares in a C corp.
S corporations
S corporations are taxed differently than C corps and, as a result, are subject to certain limitations. S corps have pass-through taxation, meaning the business income and losses are reported on the owner’s individual tax return. Unlike in a C corp, corporate income in an S corp is not taxed at the corporate level. S corporations are allowed to have a maximum of 100 shareholders and are allowed to issue only one class of stock. Further, only individual U.S. citizens can own shares in an S corp. Noncitizens, corporations, LLCs, or partnerships are not allowed to own shares in an S corp (except for single-member LLCs taxed as sole proprietorships).
It’s good to have options
Historically, all corporations were C corporations. The double taxation resulted in exorbitant taxes for small businesses, with rates as high as 96%! The S corporation came onto the scene in 1958 to solve this problem and provide relief for small businesses. S corps quickly became the go-to legal structure for small businesses. Today, there are 3 times as many S corps as there are C corps. LLCs were officially recognized in every state by the 1990s. LLCs bridge the gap between the two corporation types by having pass-through taxation with no limits on ownership and a more flexible management structure. LLCs can choose to be taxed as S corporations.
Are you ready to formalize your business? Honest Contracts can set you up for success by forming a legal entity that’s the best fit for your business and ensuring you are equipped with the necessary knowledge to maintain a legally-healthy business.
Law office of Nadia Cabrera-Mazzeo, Esq.
Based in Taos, serving clients throughout New Mexico
505 427 2025
nadia@honestcontracts.com
