The differences between a C-corporation and an S-corporation

This article looks at the differences between S-corporations and C-corporations in New York.

Deciding on the structure of a business is an important decision, both for new business owners and for those whose current business has "outgrown" its existing structure. One option that business owners have is to structure their business as a corporation. There are numerous benefits to choosing to incorporate, including decreased liability exposure, ease of raising capital, and potential tax benefits.

However, there are two types of corporate structures available in New York: C-corporations and S-corporations. Because it can be difficult understanding the differences between these two structures, below is a look at what the advantages and disadvantages of each one are.

C-corporation: What is it?

A C-corporation can be thought of as the "default" type of corporation and it is by far the most common corporate structure. A C-corporation can have an unlimited number of shareholders and all of them enjoy limited liability protection. These are two major benefits since it allows the corporation to raise significant sums of capital while also protecting shareholders from any claims made against the corporation.

A C-corporation, however, comes with one major drawback in terms of taxation. The corporation itself is subject to corporate tax while individual shareholders are then subject to personal income tax on their dividends. In effect, this means that the C-corporation is double-taxed. Also, compared with simpler business structures, such as sole proprietorships and partnerships, corporations require a lot of paperwork and regulatory compliance.

What is an S-corporation?

An S-corporation solves this double-taxation problem by allowing shareholders to take advantage of pass-through taxation. Pass-through taxation means that shareholders only pay income tax on the profits from the corporation and there is no corporate tax to be paid. Shareholders also enjoy the same liability protections as shareholders of C-corporations enjoy.

While pass-through taxation is a major advantage of S-corporations, this business structure does come with a lot of drawbacks. An S-corporation can have no more than 100 shareholders and those shareholders, with few exceptions, must be individuals. Shareholders must also be U.S. citizens or in possession of a Green Card. Furthermore, S-corporations can only issue one class of stock and they may have difficulty (at least compared to C-corporations) with raising capital.

Talking to an attorney

When incorporating a business in New York, it is imperative to have legal counsel on hand. A law firm that understands the needs of businesses both big and small will be in the best position to help them choose a structure that best fits their immediate and long-term goals.