What is an “S-corp” or a “C-corp”?
Whether referred to as an S-Corp or a C-Corp, a company is still, in general, a legal entity that is created under State law. Regardless of the name, these two are considered legitimate corporations formed in the same manner.
The only difference between an S-Corp, a C-Corp, and other corporation names and titles is how they are taxed.
A C-Corporation is a legal entity that is separate from the owners. With that, it has to pay its own taxes and dues. The process flows in the following manner:
- A corporation makes money
- It pays a corporate tax rate on their income
- Leftover profits are paid or distributed in the form of dividends to the owners and shareholders.
- The owners and shareholders get taxed on that dividend.
With that, there are two existing levels of tax for a C-Corporation — one in the corporate level, and one for the owners and shareholders. This setup is usually seen for larger and publicly traded companies.
On the other hand, there is no tax at the corporate level when it comes to S-Corps. This is because these types of corporations are taxed under a separate section of the Internal Revenue Code, specifically subchapter S.
Under this section, the corporation is not taxed, and the profits are paid directly to its shareholders and owners. They then pay their taxes directly on the full amount.
This setup is mostly preferred by small businesses because there is only one tax level that needs to be paid and there are also benefits of certain income and deduction.
S-Corporations are usually those companies with less than 20 shareholders or those that are family-owned.
What about an LLC?
An LLC can also be taxed as either an S-Corporation or a C-Corporation by making an IRS election. However, because of LLCs’ nature as a Limited Liability Company where the owners are not liable for the company’s debts and liabilities, the method of taxing is slightly more complicated.