S Corps and C Corps: An Advantage and Disadvantage Game

Get your yellow legal pad out, because we’re about to do some Corporation Comparison!

You can already educate yourself on the fundamentals of S Corps and C Corps by clicking here to watch our Prestige Auditors educational video. However, we’re going to dig a little deeper with this blog, so you can get a bigger picture of how these entities differ from each other in terms of advantages and disadvantages.

First of all, let’s remind ourselves why they are similar:

• Both corporations offer Limited Liability protection, so the owners are not responsible for business debts.
• Corporations are separate legal entities created by a state filing.
• The Articles of Incorporation are the same whether you choose an S corporation or a C Corporation.
• Both structures have shareholders, directors, and officers. The shareholders elect the board of directors. The board directs the corporation by making decisions; however, it is not responsible for everyday operations.
• There is no distinction between C and S corporations in terms of responsibilities. Both of them are required to follow internal and external corporate formalities.

Now let’s get on with the downsides and upsides!

Advantages of S Corporation

• The main advantage of an S Corp is not paying corporate-level income tax. All the income distributions are only taxed on the individual level.
• 20% of qualified business income deduction.
• All the losses of an S Corp pass through to its shareholders.

Disadvantages of an S Corporation

• A limited number of shareholders.
• Since there are some restrictions for shareholders, such as US citizens, it is harder to obtain equity financing.
• If operating under the S Corporation, the company can’t have different classes of stock.
• Some S Corporations don’t allow their shareholders to sell or transfer their shares.

Advantages of C Corporation

• An unlimited number of shareholders.
• No restrictions on ownership.
• No restrictions on classes; a C Corporation can issue more than one class of stock.
• Lower maximum tax rate. Even with the personal income tax rates being lowered, this rate is lower than the maximum personal tax rate, which is 37%.
• More options for your capital.

Disadvantages of C Corporation

• The main disadvantage is that C Corporation pays taxes on its earnings, and shareholders pay taxes on dividends; as a result, the corporation’s earnings are double- taxed.

Which is best for your business?

Keep in mind that the future of your entire business depends on what entity you choose, from taxes to financing. We have presented you with all the pros and cons of both C and S Corporations; if you can’t reach a verdict on which type is more suitable for your business, Prestige Auditors will help you come to a decision that is best for your unique business needs and goals. By comparing different types of entities, we will choose the best one for your successful operation, as well as offering a complete set of eCommerce business solutions and consultations on setting up an eCommerce business.