C
Corporations vs S Corporations.
Similarities
1. An S Corporation is simply a C
Corporation (also known as a standard business
corporation) that files IRS form 2553 to elect a special
tax status with the IRS. The articles of incorporation
that are filed with the state are same whether a
corporation is a C Corporation or S
Corporation.
2. They both are separate legal entities
that are created by a state filing.
Both offer the
same limited liability protection, the owners are
typically not personally responsible for the debts and
liabilities of the business.
3. Both entities are required to follow
the same formalities. They must hold annual meeting of
shareholders and directors are required each year and
meeting minutes must be kept with the corporate
records.
Differences
1. Taxation:
a. The S Corporation is a pass-through
tax entity – this means that the income or loss
generated by the business is reflected on the personal
income tax return of the owners.
b. A C
Corporation is a separately taxable entity. The
profits and losses are taxed directly to the
corporation. This can lead to double taxation on
dividends that are paid out of corporate profits to
the owners.
2. The ownership of an S Corporation is
restricted; however, the C Corporation does not possess
these same limitations. The following are some of the
restrictions imposed by the IRS:
a. The C Corporation can have an
unlimited number of shareholders while a subchapter S
Corporation is restricted to no more than 75
shareholders.
b. Non-US residents can be
owners of a C Corporation while an S Corporation may
not have non-US residents as
shareholders.
c. Also, S Corporations
cannot be owned by C Corporations, other S
Corporations, many trusts, LLCs, or partnerships. C
corporations are not subject to these
restrictions.
3. The S Corporation must make a timely
election of S Corporation status. For existing
corporations, the election, which is made by filing form
2553 with the IRS, must be made by March 15 in order for
the election to take effect that year. Newly formed
corporations must file form 2553 within 75 days of the
formation date in order to possibly obtain S Corporation
status for the current year.
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LLCs vs S
Corporations
Similarities
1. Both are separate legal entities that
are created by a state filing.
2. They offer the same limited liability
protection, the owners are typically not personally
responsible for the debts and liabilities of the
business.
3. Both are pass-through tax entities –
this means that the income or loss generated by the
business is reflected on the personal income tax return
of the
owners.
Differences
1. The
ownership of an S Corporation is restricted; however, a
limited liability company does not possess these same
limitations. The following are some of the restrictions
imposed by the IRS:
a. An LLC can have an unlimited number
of members (owners) while a subchapter S Corporation
is restricted to no more than 75
shareholders.
b. Non-US residents can be
members of an LLC while an S Corporation may not have
non-US residents as shareholders.
c.
Also, S Corporations cannot be owned by C
corporations, other S Corporations, many trusts, LLCs,
or partnerships. Limited Liability Companies are not
subject to these restrictions.
2. LLCs are allowed to have subsidiaries
without restriction.
3. Formalities:
a. A corporation requires formalities,
annual meetings of shareholders and directors are
required each year and meeting minutes are required to
be kept with the corporation’s
records.
b. LLCs are not required to
hold such meeting; however, it is a good idea to
document major decisions of the
company.
4. A corporation’s existence is perpetual.
Conversely, an LLC typically has a limited life span.
Most states require that an LLC list a dissolution date
in its articles of organization and certain events such
as the death or withdrawal of a member can cause the LLC
to dissolve.
5. The stock of an S Corporation is freely
transferable while the interest (ownership) of LLC is
not – typically the approval of the other members must
be received.
6. An S Corporation may have advantages
with self-employment taxes in comparison with an LLC.
For more information on this issue, please contact your
tax advisor.
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LLCs vs C
Corporations
Similarities
1. Both are
separate legal entities that are created by a state
filing.
2. Both offer the same limited liability
protection, the owners are typically not personally
responsible for the debts and liabilities of the
business.
3. Both entities have very few ownership
restrictions. The owners are not required to be US
residents and the number of owners is without
limitation. The owners are not required to be
individuals as with an S Corporation.
4. The ownership, (stock with Corporation
or membership interest with LLC) can be divided into
numerous classes.
Differences
1.
Taxation:
a. The LLC is a pass-through tax entity
– this means that the income or loss generated by the
business is reflected on the personal income tax
return of the owners.
b. A C corporation
is a separately taxable entity. The profits and loses
are taxed directly to the corporation. This can lead
to double taxation on dividends that are paid out of
corporate profits to the owners.
2. Formalities:
a. A corporation requires that certain
formalities be followed. The corporation must hold
annual meetings of shareholders and directors each
year and meeting minutes must be kept with the
corporation’s records.
b. LLCs are not
required to hold such meetings, however, it is a good
idea to document major decisions of the company and
hold regular meetings of members.
3. Transferability of
Interest:
a. Transferring stock in a corporation
is typically easier than the transfer of ownership
with an LLC. Typically, a shareholder of a corporation
is not required to get approval of the other
shareholders before selling stock. Whereas with an
LLC, the usual rule is that the owners must obtain
approval of the other owners before ownership can be
sold.
Management
1. The
management of an LLC can be by members, in which case
the management is much like that of a partnership. If
the management of an LLC is by managers, then the
management structure closely resembles a
corporation.Back to top
