Difference Between C Corporations and S-Corporations

Question: What is the difference between a C - corporation and an S - corporation? What are the advantages, disadvantages of each? Which is preferable for income tax purposes based on income levels?

Answer: An S- corporation is a C -corporation that has elected to be taxed as an S - corporation with the filing of a 2553. A corporation begins with the filing of the articles of incorporation and obtaining an EIN. A corporation is taxed on an 1120 tax form. With a C and S-corporation, owners have limited liabilty. However, the gain on C- corporation activities are taxed with in the C-corporation, which pay's estimated taxes, the same as an individual do with an estimated 1040 tax liability. The income net of tax is available for distributions to owners. This is the disadvantage of a C- corporation - double taxation - the income is taxed at the entity level and then again on the individual level to shareholders.

For instance if a C-corporation earns $50,000 for the year, the tax at the entity level is $7,500 based on a 15% tax bracket. The income net of tax is $42,500, which if distributed to shareholders would be taxed again as a distribution, at the shareholders rates (ranging from 0% to 35% depending on the individuals AGI). The advantage of a C- corporation is that it can have more than 100 shareholders, and can deduct fringe benefits.

A C- corporation that files a 2553 and is approved by the IRS to be taxed as an S-corporations must have fewer than 100 shareholders. The advantage of an S-corporation is that the income passes through to the owners on a K-1, similiar to a partnership. This permits the income to be taxed once - at the shareholders level only. However a S- corporation must have only one class of stock. As an S-corporation, income is also taxed with an RK-1 for PA shareholder, recorded on PA-40.

A C-corporation can begin as an operating company, and file for S-status at any time. However before making this decision, the company should consult with their CPA, relating to matters such as possible built in gain issues, as well as discuss the other related advantages and disadvantage to an S election.

In most instances, S-corporations are a better option for shareholders, if the the company has fewer than 100 shareholders, and has only one class of stock.