If you have incorporated your business and decide to become an S Corporation, you should know the main difference between S and C is the corporation’s tax structure.
Once you incorporate your business, you will have to decide within about two and a half months whether you want to remain a C Corporation or file a form 2553 with the IRS to become an S Corporation.
In an S Corporation, the shareholders are taxed like a partnership or sole proprietorship. In other words, an S Corporation avoids the “double taxation” of C Corporations in which taxes are paid by shareholders and the corporation itself. In a C Corporation, shareholders report income from the corporation on their 1040 form.
The S Corporation still must file a federal tax return, but the corporation itself does not pay taxes.
Once a C Corporation is formed, the corporation itself is unchanged, but the way it is taxed does—at least in most states. Some states do require S and C corporations to file taxes the same way, so you must know your state law when determining whether to choose an S corporation for your company status.
S Corporations do have some restrictions that C Corporations do not. For example, the company must be incorporated in the United States, it cannot have foreign shareholders, it cannot have more than 100 shareholders, and all shareholders must be individuals.
The S Corporations has some clear tax advantages in addition to avoiding, in most cases, double taxation. One of those is that any losses the corporation incurs can be taken against income on personal tax returns.
The S Corporation was designed for small businesses that require more structure than afforded by partnerships or even LLCs.. To determine whether an S Corporation structure is the best fit for your company, you must carefully examine the benefits and disadvantages of such a structure before making such an important decision.