Corporations are of two different kinds: the C corporation and the S corporation. If you’re thinking of converting your sole proprietorship or partnership to a corporation, you will need to choose between these two.

Which is better usually depends on the aims and objectives you have for your business. Which way to go can be a bit tricky if you are unaware of the salient features of both.

The similarities between the two are as follows:

  • One of the major similarities is the protection offered under the limited liability offer. Under this clause, the corporation’s owners are not responsible personally for paying off debts incurred by the business. So, the personal assets (car, house etc.) of the owners are saved from being seized and sold to pay off debts to creditors.
  • For both the corporations to be brought into existence, state filing is required. This makes them legal.
  • Even if you incorporate your business into S or C-corporation, the articles of incorporation must be filed with the state. These are the fundamental formation documents of businesses.
  • Both corporations give full authority to the shareholders or owners regarding the election of a board of directors. Election of officers is then carried out to manage the daily affairs of the business. The Board of Directors generally only gets involved if there’s a genuine need – such as in the cases of complex challenges and major decisions.
  • It’s mandatory for both types of corporations to strictly observe the formalities set by the state and other authorities. Issuing stock, compulsory meetings of shareholders and directors, keeping corporate records and adopting bylaws, are some of the basic internal formalities necessary for running an S-corporation as well as a C-corporation business. Paying annual fees, submission of annual reports etc, are some of the external formalities that must be observed by both the corporations.

Some of the major differences between the corporations:

  • Corporate ownership. C corporations are allowed to have an unlimited number of shareholders, but this is not the case with the S corporations. They can have at the most 100 shareholders, and they must be US residents. C corporations also cannot own them. In addition, other S corporations, LLCs or any other trust cannot own an existing S corporation. However , such restrictions are not imposed on C corporations. Also, C corporations are allowed to have multiple classes of stock, which is not the case with S corporations.
  • Taxation. S corporations need not pay taxes at the corporate level, although they need to file tax returns. Here, the business profits are transferred to the individual tax returns of the owners and so the taxes are paid at individual tax rates. This saves the S corporations from paying double taxation on the profits incurred. However, the C corporations need to file a corporate tax return and report any profits or losses. These corporations therefore face double taxations as the profits are distributed among owners as dividends. These dividends have to be reported at an individual level.
  • Election. Regular and in time filing of Form 2553 is mandatory for S corporations. It must be submitted to the IRS.