Tax Optimization: The Deciding Factor When Comparing C Corp vs S Corp

Tax Optimization: The Deciding Factor When Comparing C Corp vs S Corp

Tax laws can be complicated, but you need to make the right decisions when choosing your options as it could prove to be costly if you make the wrong choice.

When looking at the differences and similarities between C corp vs S corp, it pays to have a basic understanding of IRS rules so that you can elect to structure your business in the right way.

Here is an overview of the key aspects of these business structures, which are named after the relevant parts of the Internal Revenue Code they are taxed under.

What both options share

Before taking a look at the differences between C corp and S corp it makes sense to appreciate that there are actually a number of similarities between the two options.

For instance, you will be afforded limited liability protection regardless of whether you decide to structure your business as a C corporation or S corporation.

Both options also offer similar corporate structures, so either type of business would have shareholders, directors, and company officers. There are also no legal distinctions between the two structures when it comes to compliance responsibilities and a number of other corporate formalities.

Articles of incorporation and other formation documents are also the same whether you decide to elect your business for either a C corporation or S corporation status.

A look at the key differences

It is important to focus on the key differences between the two structures as this will allow you to make an informed decision as to which option would be best for your business and what your future plans are.

Your primary goal would be to base your final decision on how you want your corporation to be treated for federal income tax purposes.

A C corporation is viewed as a separate taxable entity and that involves filing a corporate tax return form 1120 so that you pay taxes at the corporate level. This raises the prospect of double taxation if corporate income is subsequently distributed to a business owner in the form of a dividend.

In contrast, S corps are classified as pass-through taxation entities, and that means no income tax at the corporate level. Instead, either the profits or losses or passed through to the business and dealt with via the owner’s personal tax filings.

When it comes to corporate ownership, the IRS makes no distinction between the two structures, but there are differences in relation to aspects of that ownership.

S corps are not permitted to have any more than 100 shareholders, and these must be classed as US citizens. The difference with a C corp is that there are no such restrictions relating to ownership.

Finally, it is generally considered that an S corp could be more advantageous than a C corp because you do not pay corporate-level tax. This means that income distribution is only taxed at a personal level.

Clearly, tax laws can be a legal minefield, and that is why it is wise to seek professional guidance when deciding which corporate structure suits your circumstances and business plans.

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