What is the difference between C corporations and S corporations?

When starting a business, one of the first decisions you'll need to make is what type of corporation to form. Two common options are C corporations and S corporations. While they may seem similar, there are some key differences between the two. The main difference is in how they're taxed.

C corporations are separate legal entities from their owners. This means that the corporation is responsible for its own debts and liabilities. The owners, or shareholders, are not personally liable for the corporation's debts.

One of the main advantages of a C corporation is the ability to raise capital through the sale of stock. This can make it easier for a corporation to grow and expand. However, there is a downside to this structure - double taxation.

Double taxation means that the corporation pays taxes on its profits, and then shareholders also pay taxes on any dividends they receive from the corporation. This can result in a higher overall tax burden for both the corporation and its shareholders.

S corporations, on the other hand, are pass-through entities. This means that the profits of the corporation pass directly to the shareholders' personal tax returns. This avoids double taxation, as the corporation itself does not pay taxes on its profits.

Like C corporations, S corporations also offer limited liability protection for their owners. However, there are some restrictions on who can form an S corporation. For example, S corporations cannot have more than 100 shareholders, and all shareholders must be U.S. citizens or permanent residents.

Deciding between a C corporation and an S corporation will depend on your specific business needs and goals. If you plan on raising capital through the sale of stock and are willing to accept the potential for double taxation, a C corporation may be the best option. However, if avoiding double taxation is a priority and you meet the requirements for an S corporation, it may be a better fit for your business.

It's important to consult with a legal or tax professional when making this decision, as they can provide personalized advice based on your specific situation. Whichever type of corporation you choose, both C corporations and S corporations offer unique benefits and can be successful structures for your business.