INSIGHTS

S Corporations vs. C Corporations

by Meaghan E. Greydanus, CPA, Partner

ARTICLE | January 7, 2025

Selecting the entity type for your business is an important decision. There are various reasons why one
may be a better choice than another. We can help you weigh the advantages and disadvantages of
both S and C Corporations and understand the short- and long-term implications of each type.

S Corporations

 

Advantages

  • Can raise capital with stock sales to no more than 100
    stockholders
  • Income, losses, deductions and credits pass through
    to the individual returns of S Corp shareholders,
    avoiding double taxation (S Corp files its own tax
    return reporting business income and deductions to the
    shareholder)
  • Owners have limited liability
  • Owners have ability to gift shares to reduce estate tax
    liability
  • Able to avoid personal holding company tax
  • Distributions from the S Corp are exempt from payroll
    and income taxes (assuming adequate compensation to
    employee shareholders)
  • Potential ability to claim the Qualified Business Income
    Deduction (QBID) on business income worth up to
    20% of net income

 

 

Disadvantages

  • Number of shareholders limited to 100; no corporate,
    partnership or nonresident alien shareholders
  • Only one class of stock permitted
  • Calendar year requirement with possible three month
    offset
  • Lack of tax-free fringe benefits to greater-than-2%
    shareholder/employees
  • IRS scrutinizes low compensation to shareholders
    Potential built-in gains tax on conversion of C Corp to
    S Corp
  • Corporate formalities must be followed: all transactions
    conducted through the business, stock issued, state
    incorporation filings, annual board meetings held and
    documented
  • Shareholders must directly invest to have basis to claim
    losses; guarantee of entity debt is insufficient
  • Health insurance premiums are not a direct deduction
    against business income

 

C Corporations

 

Advantages

  • Can raise capital with stock sales to more than 100 stockholders
  • Owners have limited liability
  • Corporation has perpetual life, does not automatically dissolve upon death of one owner
  • Ease of transferability of stock
  • More management resources are due to the potentially greater number of people involved in the business
  • Losses are deductible in year incurred
  • Health insurance premiums are a direct deduction against corporate income
  • Flat 21% income tax
  • Some domestic dividends are exempt from income tax
  • Shareholders taxed on money actually received
  • Stock basis rules are easier to understand for shareholders

Disadvantages

  • Earnings subject to double taxation: annual earnings are taxed to the C Corp and again to the shareholder upon dividend distributions, sale of stock or liquidation; appreciated assets trigger corporate tax upon sale or distribution at the C Corp level and again to the shareholder upon liquidation or sale of stock
  • Amount that may be left in the C Corp is limited unless appropriately documented
  • Somewhat difficult to form and to dissolve
  • Corporate formalities must be followed: all transactions conducted through the business, stock issued, state incorporation filings, annual board meetings held and documented