S-Corporation vs. C-Corporation: What’s the Difference?

A C-corporation, or C-corp, is a legal business entity that shareholders own. Those shareholders elect a board of directors, who in turn choose a management team. Major corporations that issue shares of stock via the New York Stock Exchange (NYSE) and the NASDAQ are C-corporations, but privately held small businesses can also be C-corporations. The Internal Revenue Service (IRS) taxes a C-corp for its business income, meaning its owners must also pay personal income tax on money earned from stock dividends. A business can avoid double taxation by organizing as a limited liability company (LLC) or by seeking S-corporation status, but it will be subject to other restrictions such as the number of shareholders it can have. A C-corporation also grants limited liability protection to its owners. If the company incurs debt or faces a lawsuit, the business owners are not held personally responsible, and their personal assets are not at risk. A lender or a litigant can go after the business itself—not its individual owners. An S-corporation, or S-corp, is a business entity designated under Subchapter S of the Internal Revenue Service's internal revenue code. Sometimes referred to as a "small business corporation," it combines the protection of an LLC with the corporate-level status of a C-corp. The IRS grants certain tax advantages to a business with S-corp status. The corporation does not pay federal income tax; rather, its profits pass through to the business owners, who report them on their personal income tax returns. A business with S-corporation status avoids paying double taxation on its corporate income. An S-corporation also grants limited liability to its owners. If you aim to acquire many investors, have international partners, or engage in overseas sales, a C-corporation is the appropriate entity type for your business. 1. __Select a business name__. Your C-corp will be a legal entity, and it must have a legal name registered with the government. Some companies have one legal name, but do business under another name. This is called a DBA, which stands for "doing business as." 2. __File articles of incorporation__. To establish your business, you must submit articles of incorporation to your state's secretary of state. Expect to pay a filing fee. After you’ve filed successfully, the state will send you a certificate of incorporation. 3. __Obtain an Employer Identification Number and a bank account__. The business will need an Employer ID Number (EIN) from the IRS. It will also need its own business bank account. 4. __Create an operating agreement__. A business's operating agreement establishes laws and bylaws at the shareholder level. It names ownership stakes, can set limits on the number of shareholders, and sets rules for financial distributions. 5. __Name a registered agent for the business__. A C-corporation is required to have a registered agent who accepts legal documents and tax documents on behalf of the company. 6. __Name a board of directors__. A C-corporation must have a board of directors elected by the shareholders of the business. The board must conduct quarterly meetings and make minutes available to all owners. 7. __Issue stock certificates__. C-corp owners are referred to as shareholders, and they should be given stock certificates signifying their ownership stake in the company. 8. __Apply for licenses and permits as necessary__. Some C-corporations operate businesses that are regulated by state and local agencies. Obtain the appropriate permits and licenses before conducting business. A small business owner should consider the myriad filing requirements before they elect S-corporation status. 1. __Select a business name__. Your S-corp will be a legal entity, and it must have a legal name registered with the government. Some companies have one legal name, but do business under another name. This is called a DBA, which stands for "doing business as." 2. __Organize your business as an LLC or a C-corp__. In order to elect S-corporation status, a business must begin as one of these two legal entities. File articles of incorporation with your state's secretary of state to establish your business. 3. __Obtain an Employer Identification Number and a bank account__. The business will need an Employer Identification Number (EIN) from the IRS. It will also need its own business bank account. 4. __Create an operating agreement__. A business's operating agreement establishes laws and bylaws at the shareholder level. It names ownership stakes, sets limits on the number of shareholders, and sets rules for financial distributions. 5. __Name a registered agent for the business__. An S-corporation is required to have a registered agent who accepts legal documents and tax documents on behalf of the company. If you are the sole proprietor of your business, you would naturally serve as your S-corp's registered agent. 6. __Confirm your eligibility__. To enjoy S-corp tax status, you must operate a US-based business owned by American citizens, be limited to 100 total shareholders, have no ownership from institutional investors, not be a bank or an insurance company, and not be an international sales corporation. 7. __Name a board of directors__. An S-corporation must have a board of directors elected by the shareholders of the business. The board must conduct a minimum of one annual meeting and make minutes available to all owners. 8. __File the IRS Form 2553__. Fill out and submit Form 2553, Election by a Small Business Corporation, to the IRS to establish S-corp tax status. If your business is an LLC that chooses to be taxed like an S-corp, you must file Form 1120-S with the IRS. When making S-corp vs. C-corp comparisons, consider these differences. 1. __Taxation__: An S-corp is a pass-through entity that does not pay corporate income tax. Instead of business taxes, its owners declare the income on their personal tax returns. A C-corp must pay taxes on its business income, and then its owners pay federal income tax on their corporate dividends. Owners of both business entities are advised to enlist a CPA to properly comply with current tax law. 2. __Membership__: The internal revenue code caps S-corporation membership at 100 owners. A C-corporation can publicly issue stock certificates and take on an unlimited number of owners. All publicly traded corporations are C-corporations. 3. __Types of owners__: The owners of an S-corp must be individuals, trusts, estates, or non-profits. Any entity type can invest in a C-corp, including institutional investors such as a mutual fund or a venture capital firm. 4. __Class of stock__: An S-corporation can only issue one class of common stock. A C-corporation can issue multiple classes of stock, including Class A shares, Class B shares, common shares, and preferred shares. 5. __Nationality__: An S-corporation must be domestically based, and its owners must be US citizens. A C-corporation can be based anywhere. 6. __Startup costs__: In most states, incorporating is more burdensome and expensive for C-corporations than it is for S-corporations—particularly S-corps that start as an LLC and then switch for tax purposes. Get the [MasterClass Annual Membership](https://www.masterclass.com/) for exclusive access to video lessons taught by business luminaries, including Sara Blakely, Chris Voss, Robin Roberts, Bob Iger, Howard Schultz, Anna Wintour, and more. When choosing between a C-corporation and S-corporation business structure, it’s important to understand each legal entity and how they’re different.