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C Corp vs S Corp: What's the difference?

Tim Williams's Profile

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Kent Thomas
Title: Founder
Company: Advanced CFO Solutions
(Founder, Advanced CFO Solutions) |

Tim,

Both are corporations and provide the same liability protection to their owners (if managed appropriately) - the difference is in a sub-chapter of the Internal Revenue Code. Sub-chapter "S" allows a corporation that makes this election to be treated as a partnership for tax purposes. Neither the "S" corporation nor the partnership pay income taxes at the entity level, rather all income tax attributes are "passed through" to the owners (usually based on ownership percentages). If you are an owner of an "S" corporation that has taxable income, it is passed on to you regardless of whether or not the cash is distributed. If an "S" corporation has a loss, you can use that loss to offset other income on your personal tax return (subject to certain rules & limits). A "C" corporation on the other hand, is taxed at the corporate level (and has its own set of tax rates & rules to follow). When/if a "C" corporation pays out dividends to its shareholders, they are taxable to the shareholder based on his/her personal tax situation (this is referred to as "double tax").

Regarding investors, the "C" corporation is usually the entity of choice for institutional investors and Delaware is the State of incorporation of choice because of their shareholder-friendly laws. Angel investors are usually more flexible in the beginning, however, you need to get good legal & tax advice to assist you as there are limitation on the type and number of shareholders with S corporations and other tax & legal considerations in making this decision (a lot of 'stuff' here but hopefully this helps).

Kent

Bryan Frey
Title: VP Finance/Corp Controller
Company:
(VP Finance/Corp Controller, ) |

In addition, there are governance and cost issues that separate the two models. There is a handy table here: http://www.themoneyalert.com/Corp-Entity-Table.html. And some text here http://www.thinkinglike.com/S-Corporation/S-corporation-vs-C-corporation.html and here http://en.wikipedia.org/wiki/C_corporation and here http://en.wikipedia.org/wiki/S_corporation.

In general, the loss pass-through is great in the early years getting something off the ground. However, institutional investors virtually will not invest in anything other than a C corp and making that change mid-stream can be a drag (expensive and slows down your funding process).

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