Q:

What are the differences between an S Corporation and a C Corporation?

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Quick Answer

The most significant differences between S corporations and C corporations revolve around taxation and ownership. C corporations are designated by the IRS as separately taxable entities, while the profits and losses of S corporations are passed through to individual shareholders.

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Full Answer

Income from C corporations may be taxed twice: the C corporation itself is responsible for paying taxes on the corporate net income, while shareholders are responsible for paying taxes on any dividends distributed. By contrast, S corporations are pass-through entities, where the net income earned is passed through the business and reported by the individual shareholders on their respective personal tax returns.

In addition to taxation, corporate ownership varies between the two business formations. C corporations face no restrictions with regards to ownership, while S corporations are capped at 100 shareholders. Moreover, an S corporation's shareholders must be US citizens or qualified residents. S corporations are also required to possess only one class of stock, while C corporations can provide multiple classes.

All corporations in the U.S. are classified as C corporations unless they file for S status with the IRS. To elect S corporation status – and thus secure the special tax status with the IRS – an owner must file Form 2553 with the IRS.

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