C Corporations and S Corporations.
Similarities
1. An S Corporation is simply a C Corporation (also known as a standard business
corporation) that files IRS form 2553 to elect a special tax status with the IRS. The
articles of incorporation that are filed with the state are same whether a corporation is a
C Corporation or S Corporation.
2. They both are separate legal entities that are created by a state filing.
Both offer the same limited liability protection, the owners are typically not personally
responsible for the debts and liabilities of the business.
3. Both entities are required to follow the same formalities. They must hold annual
meeting of shareholders and directors are required each year and meeting minutes
must be kept with the corporate records.
Differences
1. Taxation:
a. The S Corporation is a pass-through tax entity –– this means that the income
or loss generated by the business is reflected on the personal income tax return
of the owners.
b. A C Corporation is a separately taxable entity. The profits and losses are
taxed directly to the corporation. This can lead to double taxation on dividends
that are paid out of corporate profits to the owners.
2. Who can be an owner: The ownership of an S Corporation is restricted; however, the C Corporation does
not possess these same limitations.
a. The C Corporation can have an unlimited number of shareholders while a
subchapter S Corporation is restricted to no more than 75 shareholders.
b. Non-US residents can be owners of a C Corporation while an S Corporation
may not have non-US residents as shareholders.
c. Also, S Corporations cannot be owned by C Corporations, other S
Corporations, many trusts, LLCs, or partnerships. C corporations are not subject
to these restrictions.
3. Requirement to make an Election: The S Corporation must make a timely election of S Corporation status. The election,
which is made by filing form IRS 2553, must be made by March 15 in order for the
election to take effect that year. If the election is made after March 15 but within 75
days of the incorporation date, the election will be effective for the next calendar year. If
the S corporation is not a calendar-year taxpayer, the election must be made within 75
days of the beginning of the corporation's tax year.
LLCs and S Corporations
Similarities
1. Both are separate legal entities that are created by a state filing.
2. They offer the same limited liability protection, the owners are typically not personally
responsible for the debts and liabilities of the business.
3. Both are pass-through tax entities –– this means that the income or loss generated
by the business is reflected on the personal income tax return of the owners.
Differences
1. The ownership of an S Corporation is restricted; however, a limited liability company
does not possess these same limitations.
a. Number of owners - An LLC can have an unlimited number of members (owners) while a
subchapter S Corporation is restricted to no more than 75 shareholders.
b. Identity of owners - Non-US residents can be members of an LLC while an S Corporation may not
have non-US residents as shareholders.
c. Also, S Corporations cannot be owned by C corporations, other S
Corporations, many trusts, LLCs, or partnerships. Limited Liability Companies
are not subject to these restrictions.
2. LLCs are allowed to have subsidiaries without restriction.
3. Formalities:
a. A corporation requires formalities, annual meetings of shareholders and
directors are required each year and meeting minutes are required to be kept
with the corporation’s records.
b. LLCs are not required to hold such meeting; however, it is a good idea to
document major decisions of the company.
4. Duration: A corporation’s existence is perpetual. Conversely, an LLC typically has a limited life
span. Most states require that an LLC list a dissolution date in its articles of organization
and certain events such as the death or withdrawal of a member can cause the LLC to
dissolve.
5. The stock of an S Corporation is freely transferable while the interest (ownership) of
LLC is not –– typically the approval of the other members must be received.
6. An S Corporation may have advantages with self-employment taxes in comparison
with an LLC. For more information on this issue, please contact your tax advisor.
LLCs and C Corporations
Similarities
1. Both are separate legal entities that are created by a state filing.
2. Both offer the same limited liability protection, the owners are typically not personally
responsible for the debts and liabilities of the business.
3. Both entities have very few ownership restrictions. The owners are not required to be
US residents and the number of owners is without limitation. The owners are not
required to be individuals as with an S Corporation.
4. The ownership, (stock with Corporation or membership interest with LLC) can be
divided into numerous classes.
LLCs and C Corporation
Differences
1. Taxation:
a. The LLC is a pass-through tax entity –– this means that the income or loss
generated by the business is reflected on the personal income tax return of the owners.
b. A C corporation is a separately taxable entity. The profits and loses are taxed
directly to the corporation. This can lead to double taxation on dividends that are
paid out of corporate profits to the owners.
2. Formalities:
a. A corporation requires that certain formalities be followed. The corporation
must hold annual meetings of shareholders and directors each year and meeting
minutes must be kept with the corporation’s records.
b. LLCs are not required to hold such meetings, however, it is a good idea to
document major decisions of the company and hold regular meetings of
members.
3. Transferability of Interest:
a. Transferring stock in a corporation it typically easier than the transfer of
ownership with an LLC. Typically, a shareholder of a corporation is not required
to get approval of the other shareholders before selling stock.
b. With an LLC, the usual rule is that the owners must obtain approval of the other owners before ownership can be sold.
