What Is the Difference Between S-Corporations and C-Corporations? | Gierach Law Firm (2024)

When starting a business, one of the critical decisions owners or partners will need to make is choosing the appropriate business structure. S-corporations (S-corps) and C-corporations (C-corps) are two common options, and they can each provide certain advantages and disadvantages. An experienced attorney can provide guidance on how to select the structure that is best suited to a business’s needs.

S-corps and C-corps both offer limited liability protection, meaning that owners (shareholders) generally cannot be held personally liable for business debts and liabilities. However, these two options differ significantly in terms of taxation, ownership restrictions, and corporate formalities.

S-Corporations

Corporations with 100 shareholders or less may be able to maintain the benefits of incorporation while being taxed similar to partnerships. Advantages of S-corporations include:

• Pass-through taxation: S-corps allow profits and losses to be passed directly to shareholders, avoiding double taxation. Shareholders report income and losses on their personal tax returns. Pass-through deductions may also be used to reduce the amount of taxes that must be paid.
• Limited liability protection: Shareholders are protected from personal liability for business debts and claims.
• Single class of stock: S-corps can only issue one class of stock, simplifying the structure of the business.

However, S-corporations may also have disadvantages, including:

• Ownership restrictions: S-Corps can have no more than 100 shareholders, and shareholders must be U.S. citizens or residents. Certain types of entities, such as other corporations or partnerships, cannot be shareholders.
• More strict operational processes: S-corps are required to meet certain compliance requirements, such as holding regular board meetings and keeping detailed meeting minutes.
• Limited to one class of stock: Restrictions on the types of stock that can be issued may limit flexibility in raising capital.

C-Corporations

A C-corporation is the default structure for any new business structured as a corporation. It is taxed separately from its owners, and it can have an unlimited number of shareholders. Advantages of C-corps include:

• Unlimited ownership: C-corps can have an unlimited number of shareholders, including foreign shareholders and other entities like corporations or partnerships.
• Flexible stock options: C-corps can issue multiple classes of stock, offering flexibility in structuring ownership and investments.
• Attractive to investors: C-corps are often preferred by venture capitalists and other investors due to the potential for an initial public offering (IPO) and the ability to issue various classes of stock.

C-corporations may also have certain disadvantages, including:

• Double taxation: Profits are taxed at the corporate level and again as shareholder dividends, leading to double taxation.
• More regulatory requirements: C-corps face more stringent compliance requirements, including detailed record-keeping and reporting.
• Complex structure: Managing a C-corp can be more complex due to its structure and regulatory requirements.

Key Considerations for Business Owners

When deciding between an S-Corp and a C-Corp, business owners should consider several factors:

• Tax implications: Evaluate how each structure will impact the overall tax liability for the business and its shareholders.
• Ownership and investment: Consider plans for ownership, potential investors, and future capital needs.
• Operational flexibility: Determine the level of administrative complexity that owners and partners will be prepared to handle.
• Long-term goals: It is important to align a business’s corporate structure with the long-term business objectives and growth plans of owners or partners.

How an Attorney Can Help With Corporate Formation

Establishing a corporation involves numerous legal steps and compliance requirements. An experienced attorney can help ensure that the correct procedures are followed and that a business will be set up for success. At the Gierach Law Firm, we can assist with:

• Legal advice: We provide guidance on the best corporate structure to use to address specific business needs and goals.
• Filing and documentation: We ensure that all legal documents are prepared and filed correctly, such as Articles of Incorporation, bylaws, and shareholder agreements.
• Compliance: We can help a business maintain compliance with federal, state, and local regulations to avoid legal issues down the line.
• Ongoing support: We can provide continuing assistance with issues related to corporate governance, regulatory compliance, and other business-related legal matters.

Contact Our Naperville, IL Corporate Formation Attorney

Choosing the right corporate structure is crucial for the success and growth of your business. At the Gierach Law Firm, our DuPage County business formation lawyer can help you navigate the complexities of business structure and ensure that your corporation is set up correctly from the start. Call 630-756-1160 to schedule a consultation and take the first step toward building a positive future for your business.