What is the difference between an S-Corp and a C-Corp?

Understanding the difference between S corporations and C corporations is a critical first step when incorporating a business. Under the Internal Revenue Code, there are two different types of corporate tax treatment: C and S. These letters stand for the subchapters in the Code. All corporations are C corporations unless you file for status under subchapter S. In other words, C corporations are the default. The difference between the two types of corporations comes down to taxes.

In a C corporation, or C-Corp for short, income is taxed twice. First, the corporation itself pays tax on any net income. The shareholders must then pay taxes on any distributions. Most large and publicly-held businesses are C-Corps. 

Unlike a C-Corp, an S-Corp is taxed only at the shareholder level. The business itself is not taxed. To receive S treatment, corporations must meet certain requirements. Specifically, they must: 

  • Be domestic;
  • Not have more than 35 shareholders;
  • Not be affiliated with some other, larger corporate entity;
  • Have one class of stock only;
  • Not have corporate or partnership shareholders; and
  • Have only U.S. citizen and resident alien shareholders.

Keep in mind that all shareholders must agree to the S treatment. Also, a business must first be incorporated in the state where it is headquartered before filing for S status.

Because S-Corps are taxed only once, you and your business can save in taxes. There are many other things to consider, however, before you seek subchapter S treatment. To find out whether filing for S status is right for your Illinois corporation, speak with an experienced corporate and business tax law attorney.

Source: SBA.gov, "Should My Company be an LLC, an S-Corp or Both?," Aug. 27, 2015

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