Comparison of S corporations and C corporations

The Following Applies to All Corporations:

  • A corporation is an artificial being created by state law. In other words, it is a creature of the state.
  • A corporation is a separate legal entity, separate and apart from it owners (called stockholders or shareholders).
  • Although a corporation does not have a physical presence, it does have a board of directors to set the direction and policies of the organization and corporate officers to carry out the policies and run the day-to-day operations.
  • Examples of what a corporation may do include:
    • Enter into contracts, sue and be sued, have a bank account in its name, and be a partner in a partnership.
  • A corporation's name is signed by corporate seal.
  • Stockholders receive limited liability protection which insulates their personally owned property against the claims of corporate creditors.

For more about the legal aspects of a corporation, see Ten Attributes of a Corporation.

TAXES

  • From a legal standpoint, a C corporation and S corporation are the same. The distinction between a C and S corporation is in how C and S corporations are taxed under the Internal Revenue Code (IRC).
  • The C and S refer to the sections (subchapters) of the Internal Revenue Code.
  • C corporations file Form 1120.
  • When corporations are initially formed, they are subject to IRC rules under subchapter C - Corporate Distributions and Adjustments .
  • After initial incorporation, an election may be made to be taxed under subchapter S - Tax Treatment of S Corporations and Their Shareholders instead of subchapter C.
  • The election is made by filing Form 2553 with the IRS.
  • Once the election is approved by the IRS, the C corporation is converted to an S corporation.

Note: The legal status of the corporation is not affected by an election to be taxed as an S corporation. The laws of the state of incorporation still apply.

  • A C corporation is a tax-paying entity; it pays taxes on corporate income. In other words, income is initially at the corporate level.
  • C corporation Income that is not distributed to stockholders is called retained earnings.
  • C corporation income distributed from retained earnings to stockholders is called dividends.
  • C corporations stockholders pay taxes on dividends distributed to them from retained earnings.
  • Net income of C corporations is subject to double taxation, first at the corporate level, then, if distributed to shareholders as dividends, at the individual level.
  • C corporation dividends are reported to shareholders annually on Form 1099-DIV. The IRS also gets a copy of this form.

C corporation Losses

  • Net losses incurred by a C corporation are deducted from corporate income of other periods; they do not pass through the entity to its stockholders.
  • Capital losses of C corporations may only be deducted from corporate capital gains and not from regular corporate income.
  • Unlike the capital loss treatment for individuals, where capital losses in excess of $3,000 may only be carried forward, capital losses of C corporations may be carried back three years and forward five years. See Capital Gains and Losses for C corporations for more information.

An S corporation is generally not taxed at the corporate level because it is a pass-through entity. However, there a some exceptions where an S corporation may be subject to income taxes at the corporate level. These exceptions generally apply to older C corporations that were operating for several years before converting to S corporation status. Newly formed S corporations are not subject to these exceptions and therefore, are never taxed at the corporate level..

  • An S corporation is treated as a partnership for federal tax purposes. This means, like a partnership, an S corporation is a tax-reporting entity and not a tax-paying entity (with the exceptions referred to above).
  • An S corporation files Form 1120S to report income, expenses, gains, losses, and credits.
  • Income, deductions, gains, losses, and credits pass-through the S corporation directly to its shareholders who report these items on their individual income tax returns.
  • Schedule K-1 is issued annually by the S corporation to each shareholder reporting their share of income, deductions, gains, losses, and credits.

S corporation Losses

Losses incurred by an S corporation pass-through the entity to its stockholders who may deduct their share of the loss against their other sources of income reported on Form 1040.

File your personal and small business taxes (Schedule C)