C corporations and S corporations are corporate structures under the corporation umbrella. Both types are named after the parts of the IRS code under which they're taxed. Each structure has its own tax requirements, benefits and shortcomings.
If you're considering whether C corporation or S corporation status is better suited to your business, start by exploring their similarities and differences.
A C corporation is the standard type under IRS guidelines, named after Subchapter C of the IRS Code. It's an independent legal entity with an unlimited number of owners and, in some cases, international shareholders. A C corporation pays corporate taxes, while its shareholders pay income taxes on the dividends they receive.
Large businesses and publicly traded companies are typically set up as C corps. This structure enables limitless growth through stock sales, making it particularly appealing to investors. Owners aren't required to be United States residents, which makes C corporations ideal for international investors and entrepreneurs starting new businesses in the U.S.
A C corporation pays taxes at the entity level, which involves a 21% flat tax. It doesn't pay any tax on its earnings — rather, it pays corporate tax on its income. The company then pays its shareholders dividends from its post-tax income, and the shareholders pay personal income tax on these dividends. This is commonly known as “double taxation.”
To calculate their income subject to the flat corporate tax rate, C corps must complete and file Form 1120 — U.S. Corporation Income Tax Return. They report their income, deductions, credits, losses and gains to determine their tax liability.
The due date for Form 1120 depends on whether the company follows a calendar or fiscal year. For tax purposes, most businesses use the standard calendar year — January 1 to December 31 — as their fiscal year. In this case, the due date is April 15 each year, the same due date for most individual tax returns. If the company can't meet the deadline, it can file Form 7004 to request a six-month extension. However, it must file Form 7004 before the original tax filing due date.
In contrast, some companies opt to follow their own fiscal year. In that case, the deadline for Form 1120 is the 15th day of the fourth month following the last day of the corporation's tax year. For example, if a company's fiscal year is June 1 to May 31, it would need to file Form 1120 by September 15.
Under IRS rules, C corporations generally don't receive 1099 forms, as they already report their income and expenses on Form 1120.
No, a nonprofit organization is not considered a C corporation. While C corporations aim to generate revenue for their owners, nonprofits are formed for charitable purposes.
Both types of organizations have similar formation processes and give liability protection to owners. However, their tax filing requirements differ. Unlike a C corporation, a nonprofit can apply for tax exemption. Nonprofits that are granted 501(c)(3) status by the IRS are tax-exempt.
S corporations are taxed according to Subchapter S of the IRS Code. These legal entities pass income, deductions, credits and losses through shareholders for federal tax purposes, hence their designation as “pass-through entities.” Rather than paying corporate taxes on income, S corps pay salaries to their employees, who then pay individual income taxes on these salaries.
To qualify as an S corporation, the company must have a maximum of 100 shareholders, and all shareholders must be U.S. residents. In contrast, C corps don't have ownership restrictions. Moreover, S corporations can only have one class of stock, while C corporations can have more than one.
While some S corporations may be taxed at the state level, they don't pay federal corporate income taxes. Rather, the business's shareholders divide the income amongst each other and report it on their individual tax returns. That means that, unlike C corporations, S corporations aren't subject to double taxation.
Each year, S corporations must file Form 1120-S to report their income, deductions, credits, losses and gains to the IRS. Additionally, they must provide each shareholder with a Schedule K-1 form, which reports the amounts passed through to each shareholder. While S corps benefit from pass-through taxation, they can still be subject to other federal taxes, such as employment and built-in gains taxes.
The deadline for both Form 1120-S and Schedule K-1 forms is the 15th day of the third month after the S corp's tax year ends. For calendar-year S corporations, this would be March 15, unless that day is a holiday or weekend. However, if the company cannot meet the deadline, it can file Form 7004 to request a six-month extension, pushing the deadline to September 15. This filing also extends the deadline for Schedule K-1 forms.
Like C corporations, S corporations don't generally receive 1099 forms. They are pass-through entities, and their incomes are reported directly on their owners' tax returns instead of at the corporate level.
No. Like C corps, S corporations are for-profit businesses, while nonprofits are often tax-exempt under Section 501(c)(3) of the IRS Code.
To recap, C corps and S corps differ in these key areas:
Keep in mind that you don't technically “become” a C corporation or an S corporation. You form a corporation, which is taxed under Subchapter C unless you're eligible for and choose to be taxed under Subchapter S.
Many small and medium-sized companies can benefit from pass-through taxation with S corporation status. Larger LLCs usually opt for C corporation status to get a lower tax rate or appeal to future buyers and investors. Of course, it ultimately depends on your unique situation, and an experienced tax advisor can work with you to navigate this decision.
Choosing the ideal tax structure for your business is critical. Our team at SD Mayer & Associates can help you explore S corporation or C corporation options to make the most informed decision for your company's growth. You can also partner with us for other corporate tax services, including comprehensive tax preparation and compliance review. We have over 30 years of expertise, and we assist businesses of various sizes and industries.
Collaborate with us for a full range of corporate tax solutions. Contact our team today to get started!