Differences between C Corporations and S Corporations
A corporation is one type of business entity that can be created by business owners. When owners decide to incorporate their business, they must make a second decision to either form a C corporation or an S corporation. Each has its own distinct advantages and disadvantages, and the usefulness of one form over another will depend upon the specifics of the business itself. Below is a comparison of the characteristics of a C corporation versus an S corporation.
Tax Issues
The main difference between these two types of corporation lies in how each pays its taxes. C corporations are subject to double taxation because the company must pay income tax on its profits, and then the owners must pay income tax on their share of the profit. S corporations, on the other hand, are only taxed once. The corporation itself does not pay income tax, but owners do pay income tax on the profit share that they receive from the company.
Debt Liability
Another big difference between C corporations and S corporations falls under the issue of debt liability. In an S corporation, the owners receive profits directly, but they may also be liable for the corporation's debt. If the corporation has a bad year and loses money, the owners of the S corporation may be held personally liable for the loss. Conversely, the owners of a C corporation typically do not have this burden. They cannot be held personally liable for corporate debt.
These are two of the key differences between how C corporations and S corporations operate. Each can be an advantageous structure in different circumstances. If you are considering a corporate structure for your business, it may be in your best interest to consult with an experienced business advisor prior to making your decision so that you choose the best structure for your company's interests.
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For more information on business entities and how we can help you choose the right structure for your company's needs, contact the Texas corporation experts of Texas Legal Entities today at 512-472-2431.
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