Difference Between S Corp vs C Corp Tax, Formation, Ownership & More

S Corp vs C Corp taxesOne fundamental choice you have to make when starting a business is its legal structure.

If you have narrowed your selection down to S and C corporations, read on.

Both have profound tax implications, so knowing the difference between S corp vs C corp taxes is crucial to selecting the right legal structure for your needs and ensuring the continued success of your business.

S Corp vs C Corp

Should you go for C corp or S corp status?

Both have their pros and cons. As you will see below, which one would work best for you depends on the size and nature of your business, how you plan to manage it day-to-day, and your long-term financial goals.

With this in mind, let us explore the benefits of C corp vs S corp status, how they are similar, and what sets them apart.

What Is the Difference Between S Corp and C Corp Status?

The main difference between C corp and S corp is that the former is a type of business entity while the latter is a tax classification.

This can be confusing for new business owners, as the two terms are often compared side by side as if they were alternatives to one another. They are not. In fact, your business can be both a C and an S corporation.

Here is how this works.

To become an S corporation, you must first register a limited liability company (LLC) or a C corporation. 

Then, you need to let the Internal Revenue Service (IRS) know that you want to be taxed under Subchapter S (hence the term “S corp”) of Chapter 1 of the IRS Code. Essentially, this means that you will be taxed as a partnership.

If you register a C corporation and do not make a tax election, you will be taxed as a C corp by default.

Other key S corp and C corp differences include different formation, ownership, management, and operations requirements. We will take a deeper dive into these topics in the sections below, followed by a pros and cons S corporation vs C corporation comparison.

S Corp vs C Corp Taxes

How is C corporation vs S corporation taxation different?

C Corporations

The primary C corp vs S corp tax difference is that C corporations are subject to double taxation. The entity is taxed once at the corporate level. The shareholders are then taxed separately a second time on the personal income they receive as owners or employees. 

Essentially, you are losing money twice on the same revenue. This could be particularly challenging for smaller businesses or startups with more modest budgets.

That said, S corporations are not necessarily the clear winner in the S corp vs C corp tax advantages debate. Here is why:

  • Corporate taxes in Florida are relatively low compared to other states. The standard rate on federal taxable income is 5.5%. You may also qualify for exemptions that can significantly lower your effective tax rate. In addition, your first $50,000 in income is exempt from state corporate tax.
  • Florida does not have a blanket franchise or privilege tax. Many other states apply these types of taxes to businesses generally. This could ramp up your savings even further.
  • Florida does not have a personal income tax. If income from your business passes through to you personally, that amount will not be taxed on your personal state tax return.
  • You can deduct charitable donations and benefits. With a C corporation, you can deduct up to 10% of the company’s income as charitable donations and contributions on your corporate tax return. You also get to deduct benefits such as health insurance for your employees.
  • The federal corporate tax rate has been lowered. The Tax Cuts and Jobs Act of 2017 capped C corp taxes at a single flat rate of 21%, replacing the earlier rates that ranged between 15 and 35%.

S Corporations

Unlike C corps, S corporations are subject to pass-through taxation. This means that they do not pay federal and state corporate tax. 

Instead, all profits, losses, credits, and deductions “pass through” to the owners, also known as shareholders. Everything is recorded on their personal tax returns and taxed at individual income rates, similar to a sole proprietorship or an LLC. As a result, you avoid double taxation at both the corporate and personal level, often resulting in significant savings.

S corp tax election is especially popular among Florida small businesses. As the state does not tax personal income, pass-through taxation effectively shields you from paying any state income tax whatsoever.

Note that if you are an S corporation shareholder, you must use Form 1120S to file your taxes.

Another thing you should know is that the owners of an S corporation must receive a salary on which they owe Medicare and Social Security taxes. This is not the case with dividend income or any remaining profits. These will be passed through to you as an owner and not as an employee, so you will not have to pay Medicare and Social Security taxes on those funds.

The IRS also tends to scrutinize S corp tax filings more closely than those of C corps. A single mistake could cost you your S corp status.

Difference Between S and C Corp Liability

When it comes to liability, there is not much difference between an S and a C corporation.

Both legal entities offer limited liability protection, meaning the owners are not personally responsible for the company’s debts or other financial obligations. In the event of a lawsuit, your personal assets will be safe.

This is not the case with sole proprietorships and some types of partnerships, which have unlimited liability that puts the owners’ assets at risk.

Which One Is Easier to Form: C or S Corporation?

C Corporations

To incorporate a C corporation in Florida, you must:

1. Choose a Business Name

Your company name should be unique in the jurisdiction and must feature one of the following words:

  • Corporation
  • Company
  • Incorporated
  • Corp.
  • Inc.
  • Co. 

To check if your name is available, run a search on the Florida Department of State Division of Corporations website.

2. File Articles of Incorporation 

These should be filed with the Division of Corporations by post or online and must include:

  • The name of the corporation
  • Principal street address of the business
  • The company’s purpose
  • The number of shares the corporation may issue
  • Names and addresses of the directors and/or officers (optional)
  • Name, signature, and address of a registered agent 
  • Name and address of the incorporator
3. Appoint a Registered Agent

Every corporation in Florida must have a registered agent. This can be an individual or a corporation that:

  • Is authorized to do business in the state
  • Agrees to receive legal papers on the corporation’s behalf in the event of a lawsuit
4. Obtain an Employer Identification Number

You can apply for a federal employer identification number (EIN) for free on the IRS website.

5. Prepare Corporate Bylaws

You do not need to file Florida corporate bylaws with the state. Bylaws are an internal document that sets out the basic rules for the day-to-day operations of a corporation. 

Bylaws are not mandatory but are highly recommended because they help streamline the corporation’s management. They are also a good way to show potential investors, employees, creditors, the IRS, and other third parties that the business is legitimate. 

Bylaws should be kept at the corporation’s principal office.

6. Appoint a Board of Directors

A board of directors is a governing body that represents the shareholders. The board’s responsibilities include creating policies for the management team, meeting at regular intervals, and keeping meeting minutes. 

You may appoint your initial directors by naming them in the articles of incorporation. Alternatively, the incorporator can appoint them once the corporation is formed. 

At their first meeting, the directors should:

  • Adopt bylaws
  • Appoint corporate officers
  • Select a corporate bank
  • Authorize the issuance of shares
  • Set the company’s fiscal year
  • Adopt a corporate seal and a stock certificate form
7. Issue Stock

The corporation must issue stock to each shareholder. Florida law does not set a par value for corporate stock, but you can do so if you want and include it in the articles of incorporation. You must also enter the shareholders’ names and contact details in the company’s stock transfer ledger.

8. File an Annual Report

All for-profit corporations in Florida must file an annual report to remain active. Your first report is due between January 1 and May 1 of the year following the company’s incorporation. The report is filed online. 

S Corporations

C corporations are the “default” corporation type. When you file articles of incorporation, you will automatically be classified as a C corp.

Forming an S corporation is more work. To start, you must research how to incorporate in Florida and register an LLC or a C corp. You then need to submit Form 2553 when filing the articles of organization (LLC) or articles of incorporation (C corp).

Additionally, the election of S corp status should be approved by the board of directors.

Difference Between C Corporation and S Corporation Ownership

C Corporations

There are no restrictions on C corp ownership or classes of stock. You can have as many owners as you would like, and anyone can be a shareholder, including:

  • Individuals
  • C corporations
  • S corporations
  • Other companies
  • Trusts

This makes a C corporation a good choice if you expect high growth or plan to go international and issue multiple classes of stock. Having an unlimited number of shareholders is also useful if you plan to seek funding through investors or sell the business in the future.

S Corporations

S corporations are limited to one class of stock and up to 100 principal shareholders who can only be U.S. citizens. 

Non-U.S. citizens, permanent residents, and other corporate entities – including LLCs, partnerships, sole proprietorships, trusts, C corps, and S corps – cannot be owners. This could be an issue if you hope to get acquired down the line.

On the flip side, however, a smaller group of owners may be more involved in day-to-day operations. You may even have employee-shareholders. This could be a good thing if you value the input of your shareholders.

Because there is no difference in the types of shareholders that can hold stock in the company, an S corp also enables you to avoid having a ranking order.

S vs C Corp Management and Operations 

C corp and S corp businesses have similar corporate structures.

Both will have a board of directors handling policy and strategy concerns and a CEO-headed management team running day-to-day operations. In both cases, you must adopt corporate bylaws, hold initial and annual shareholders meetings, keep meeting minutes, and issue stock shares.

The main difference between C and S corp management has to do with the shareholders. While there are no limits on C corp ownership, S corporations can only have up to 100 shareholders who must be natural persons and U.S. citizens.

The fewer the shareholders, the more likely they are to be more involved in the day-to-day running of the company. This could be a good or a bad thing, depending on how much shareholder input you are looking to get.

The restrictions on ownership could also limit your growth opportunities in the long run. You can only have so many owners; you may not have more than one class of shareholders; and you cannot be acquired by other companies.

That said, not every company is looking to receive funding, attract external shareholders, get acquired, or grow indefinitely. If you have a small family business and plan to keep it that way, an S corp tax election could work great for you.

The only thing you need to be mindful of is IRS scrutiny. Tax authorities tend to watch S corporations more closely, so you should ensure that you keep a clean record at all times. A single mistake could cause you to lose your S corp status altogether. 

Recap on the Pros and Cons of S Corp vs C Corp Status

Here is a brief summary of the pros and cons of both business structures, including the implications for S corp vs. C corp taxation, liability, formation, ownership, management, and more:

Pros and Cons of a C Corp in Florida

Advantages of C Corp over S Corp

  • Easier to form (less paperwork)
  • Unlimited number of owners
  • No restrictions on shareholder classes
  • Less scrutiny from the IRS
  • Easier to attract shareholders and investors
  • Can get acquired by other companies
  • More growth opportunities

Disadvantages of C Corp over S Corp

  • Double taxation at both the corporate and personal level

Pros and Cons of an S Corp in Florida

Advantages of S Corp over C Corp

  • Pass-through taxation ensures you do not pay corporate tax

Disadvantages of S Corp over C Corp

  • More paperwork
  • Up to 100 shareholders only
  • Shareholders must be natural persons
  • Shareholders must be U.S. citizens
  • Cannot be owned or acquired by another company
  • Harder to attract shareholders and investors
  • More limited growth opportunities
  • Heightened IRS scrutiny
  • One mistake can cost you your S corp status

Need Help Navigating C Corporation vs S Corporation Difference Under Florida Law?

Still not sure whether corporation type S or C is right for you? You are not alone. Florida corporate law is complex, and there are many nuances to the C vs S corporation dilemma.

To find out which business structure would best serve your needs, contact the Cueto Law Group today. Our experienced corporate attorneys will help you understand the differences and guide you through the incorporation process.

Which Is Better, S Corp or C Corp? Final Thoughts

Like most questions in corporate law, this one does not have a clear-cut answer. A key difference between S corporations and C corporations is that the S corp tax election enables you to benefit from pass-through taxation and save on corporate taxes.

However, the C corporation and S corporation differences do not stop there. You should consider many other factors, including their respective formation, ownership, and management requirements.

Ultimately, whether S or C corporation status would suit you best depends on the size and nature of your business, your long-term goals, and how you plan to run the company on a day-to-day basis.

S vs C Corporation FAQs

Read the answers to common questions about the difference between C and S corporation status:

Can an S Corporation Be Taxed as a C Corporation?

S corporations cannot be taxed as C corporations. S corporations are subject to pass-through taxation, which means that the company income “passes through” to the owners and is taxed at personal income tax rates. C corporations are taxed twice: once at the corporate level and separately at the personal level.

Can You Change from S Corp to C Corp?

You can change from S corp to C corp, but there is no standard IRS form to that effect. Instead, you will have to file a written statement as well as consent signed by a majority of the corporation’s shareholders with the appropriate IRS service center.

Can You Change from C Corp to S Corp?

To convert your C corporation into an S corporation, you must file Form 2553 (Election by a Small Business Corporation) with the IRS. The filing deadline is two months and 15 days from the start of the tax year. The form must be signed by all shareholders.