C Corporation v. S Corporation

Both the C corporation and the S corporation are formed the same way under state law and are the same legal entity for corporation law matters.  This means that both types of corporations have the same legal structure and management structure and are subject to the same state formalities and requirements.

The difference between a C corporation and an S corporation is really a federal income tax difference.

C Corporation
Under the Internal Revenue Code, a C corporation is subject to the corporation tax structure which is a double taxation structure.  Profits from a C corporation are subject to one level of corporate tax and then if any profits are distributed to shareholders, those same profits are subject to a second level of tax.

C corporations do have unique tax benefits when it comes to employee benefits.  If your corporation intends on offering employees certain benefits such as pension and 401(k) plans, fringe benefits, and stock options, you should seek the advice of your accountant to determine which tax structure is best for your corporation. 

S Corporation
An S corporation is taxed under the partnership tax structure for federal income taxes.  Under this structure, the profits of the S corporation are only taxed once and this is known as pass-through taxation. 

However, not every corporation can choose to be an S corporation.  The corporation and its shareholder must meet certain requirements. The major ones are as follows:

• The corporation cannot have more than 100 shareholders;

• All shareholders generally must be individuals;

• All shareholders must be US citizens or permanent residents;

• The corporation can only have one class of stock;

If you form a corporation and want to avoid the double taxation structure of C corporation, your corporation must file a Form 2553 S corporation election with the IRS and this should be filed no later than the 15th day of the 3rd month after the corporation has been incorporated.