Entity Review - S and C Corporations

C Corporations and S Corporations are the two main types of corporations. There are several differences between S and C Corporations but the main two differences relate to shareholders and taxes.

S Corporations are generally used by small businesses, offer limited personal liability, and limited to 100 shareholders. C Corporations do not have a shareholder limit and is the preferred entity if a business owner has aspirations of going public (selling publicly traded shares on the stock market).

Regarding taxes, S Corporations do not pay corporate taxes. The profits and losses of the corporation pass through to the individual shareholder's personal income tax returns. Unlike sole proprietorships and general partnerships, profits that pass through to the individual shareholders are not subject to self-employment tax (social security and medicare tax). Self-employment tax cannot be completely avoided since the IRS states that shareholders that provide services on behalf of the S Corporation should be paid a reasonable wage that is subject to social security and medicare tax.

A C Corporation is a taxpaying entity with the profits being subject to double taxation. Double taxation occurs as profits from a C Corporation are subject to income taxes at the corporate level and again at the individual shareholder level when profits are distributed as taxable dividends.