C Corporation and S Corporation Comparison in Easy Terms

Most small business owners understand the main benefits of creating a corporation online or filing the articles of corporation online. However, there lies a distinction between the two types of corporation that can be filed online. The typical type of corporation is called a "C" corporation, and has the most often recognized trait of incurring double taxation. The second type of corporation actually starts out as a "C" corporation, but by filing a special form with the IRS your business will be able to qualify under the guidelines of an "S" Corporation.

What are the differences? Well, first of all, both types of corporation filings will have the same set of core features that define a corporation. Those are basically the protection from liability and lawsuits, due to the corporation's status as a separate entity from its investors. A shareholder in a corporation can never be held personally liable for the actions of a corporation unless there is outright fraud involved (think Enron). Both types of corporation also allow for an easy transfer of ownership, and the all important designation of inc. after your company name to gain credibility as a business.

While these traits are very similar, an "S" corporation has the added benefit of allowing "pass-through income". Basically this means that your income only gets taxed once. The corporation does not have to pay taxes in addition to paying taxes on your own personal income derived from a salary. This exemption can be very important especially to smaller businesses who are not generating the types of profit that would justify investing large amounts back into the business.

So, why would anyone want a regular "C" corporation? Well, first of all not everyone can qualify for the "S" corporation exemption status. The S corporation also does not allow some of the fringe benefits that are most likely going to be important to medium to large sized businesses. An S corporation will only quality if it has fewer than 75 shareholders (obviously it cannot be a publicly held company). Additionally, an S corporation will only be able to issue one type of stock. For small businesses, this will not be an issue, since they will not have enough shareholders to justify needing both common stock and preferred stock designations.

There are other small rules involving an S corporation, one such rule being that all shareholders are US citizens and cannot be corporations themselves. However, for most small businesses (and some medium sized businesses) it is a great option to avoid heavy taxation. After filing your corporation papers online, most online legal document services will allow you to also request status as an S corporation if your business meets the requirements.