How are S Corporations and C Corporations different?

Companies are one of the most common types of company in the world. In fact, most of the largest and most recognizable companies in the world companies: Nike, Microsoft and Coca-Cola are all examples of large, multi-national corporations. But, unsurprisingly, there are a wide range of different types of enterprises, depending on all kinds of symptoms. In the US, companies are divided into two types, based on tax :. C corporations and S companies, so called because of what taxes they file under section

Corporations are all defined by certain criteria communicated all such companies, namely:

  • Companies are owned by investors who buy shares on the stock market. Shares stock grant percentage of ownership.
  • While the company is owned by investors, day-to-day operations managed by a board of directors, elected by the investors themselves.
  • Investors have limited responsibility in the company. This means that they are only responsible up to the amount of the investment. Personal income and property is at risk if the company were to fail.
  • The company as a separate legal entity, which means that it can sue or be sued as if it were a real person.

These four characteristics describe almost all businesses, with a few exceptions (closely held corporation, for example, not shares sold in the market). However, the US tax code has different sections based on whether the company meets certain conditions.

S Corporations

Generally speaking, S companies do not pay taxes. Instead, the loss or dividends is divided among investors, who will then pay tax depends on the income. This avoids the problem of double taxation, which would occur if a company were taxed and the investor was taxed on the money he or she received from the investment. If that occurred, the same money would be taxed twice. These S corporations are much more regulated than their counterparts C. They can not have more than 100 investors, must be owned by US citizens, and can only issue one class of stock.

C Decision

Most of the larger companies are C companies (which are many smaller small businesses). C corporations pay taxes as a separate entity, which can often lead to problems of double taxation. If the company can not meet all the requirements for S corporations, it is automatically a C corporation.


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