When filing taxes as a business corporation, it is important to know the difference between an S-Corporation and C-Corporation. Your corporation will automatically be taxed as a C-Corp unless you qualify for and elect to be taxed as an S-Corp. Let’s outline the differences so you can be clear.
Who Pays The Taxes
The main difference between S-Corporations and C-Corporations comes into play when filing a federal tax return, as explained by bizfilings.com. In a C-corp, the corporation pays income taxes. In an S-Corp, the shareholders pay taxes on their share of the corporation’s income. This makes an S-Corp a pass-through tax entity. The profits or losses of the business are passed through to the business and reported to the owners’ personal tax returns.
When You Pay Taxes
The TaxAct blog explains, “An S corp shareholder will pay taxes in the year their money is earned, but a C corp shareholder will only pay taxes on their business income when the business distributes dividends or when shareholders realize a capital gain, so there can be flexibility on when you pay your taxes, and when you get paid.”
C-Corps can be subject to double-taxation wherein the company pays corporate income tax and the owners of the company are also taxed on the income they make.
A major difference that separates S-Corps and C-Corps is shareholder regulations. Whereas a C-Corp can have multiple levels of shareholders and the stock they own in the company, S-Corps can no more than 100 shareholders all owning one class of stock. In an S-Corporation, shareholders must also be US Citizens.
These differences can make handling taxes for your small business especially confusing. If you recently started a business or are considering filing as an S-Corp instead of a C-Corp, let Schlenner Wenner help.