You might get confused between S Corporation and C Corporation due to the nuance differences and considerable similarities between them. So, if you are going to set up your business, you might come across two options S Corp vs C Corp.
The HM Revenue & Custom (HMRC) taxes every business using its two tax structures. One is the C Corporation and the other is S Corporation. In this blog, we will share similar qualities between C Corporation and S Corporation.
Besides, we will share some differences that confuse the business owners to brush away their confusion. So, let’s start!
What is S Corporation?
An S corporation status is achieved by following the certain codes of the HM Revenue & Custom (HMRC). S corporation is a business entity where the shareholders and the businesses can avoid double taxation at the federal level.
A business entity transfers the incomes, losses and deductions to its shareholders. The shareholders show this income and other monetary records on their tax returns, both distributed and undistributed returns.
What is C Corporation?
C Corporation is a business where the earned income passes through two levels of taxes. The business pays taxes when the profit is earned and then the shareholders pay taxes when they receive the distributed profits.
However, this double taxation can be avoided if an organisation gets elected as an S corporation with the HMRC after complying with the HMRC code and requirements.
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Similarities between C Corporation and S Corporation
Let’s first discuss the similarities between S Corp vs C Corp and why they look alike on many levels!
Legal Status
Both C Corporation and S Corporation share a legal status. However, both of these entities enjoy a separate legal status. The legal position of these two entities is different from each other.
Limited Liability Protection
C corporations and S corporations provide limited liability protection to its shareholders. In other words, their shareholders are not responsible for the debts and liabilities of the company. The shareholders are responsible only up to the amount invested in a company.
Certificate of Incorporation
Both corporations file the same documents with the state regardless of their taxing status. These documents are known as articles of incorporation. This document verifies that the company complies with the Companies Act of 2006 and is duly registered.
Organisational Structure
The organisational structure and the way these two corporations operate are similar. The organisational structure comprises shareholders, Board of Directors, and organisational staff.
Management of Corporate Affairs
Both C Corporations and S Corporations have similar corporation procedures and regulations. For example, issuing stocks, annual meetings, public dealings, and other official procedures to deliver the services as a corporation.
Differences between C Corporation and S Corporation
Now, we will discuss the differences between S Corp vs C Corp.
Federal Income Taxation
As discussed earlier, the business can decide how they want to manage their taxation system. The C Corporations are small-scale businesses and pass through the two-level of taxation. On the other hand, An S Corporation, also called S Subchapter, does not pay the tax as an entity. Instead, the shareholders pay taxes on their incomes.
Number of Owners/Members
The HM Revenue & Custom (HMRC) restricts an S corporation from having more than 100 members at a time. On the other hand, a C Corporation can have more than 100 members. As all publicly traded companies have an unrestricted number of memberships, they are the C corporations.
Ownership of Corporation
An S corporation requires the owners to be estates, individuals, trusts or non-profit organisations. On the contrary, mutual funds and venture capital firms can own C Corporations for the sake of earning high returns.
Stock Types
The S Corporations can issue only one type of stock. On the other hand, the C Corporations are free from this restriction of stocks and can issue every type of stock.
Nationality
S Corporations are established and owned domestically. The nationals of the UK manage these small businesses while you can establish C Corporations anywhere and anyone can manage them.
Conclusion
Lastly, we can say that both corporations are similar in their organisational structures and legal proceedings. However, the chief difference is the way these two types of organisations are taxed by the federal government. Secondly, the number of members and the type of stocks distinguish them from each other.
If you want to choose S Corp vs C Corp, you must decide on the management of taxation and the purpose of your business. On the other hand, you can switch your corporation from C to S corporation at a higher cost.
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Disclaimer: This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances.