What is the Difference Between an S Corporation and a C Corporation?

There are a number of differences between an S corporation and a C corporation, though the way in which the corporation and its shareholders pay taxes is the major difference. A C corporation is, essentially, a basic corporation that has stocks, shareholders, and corporate protection from liability in case of lawsuit or other legal action. While an S corporation has much of the same protection for shareholders that own the company, the shareholders of this type of company pay personal income tax and the corporation does not. This elimination of double taxation is the major difference between an S corporation and a C corporation.

There are a number of similarities shared by an S corporation and a C corporation. Both types of companies begin with incorporation procedures that allow ownership of the company to be established through ownership of stocks or shares of the company. An S corporation and a C corporation also both provide corporate protection for those shareholders, so they have no personal liability in the company beyond the investment made in purchasing stocks or shares. This means that if a lawsuit is brought against such a corporation, then only the corporation itself, as a separate entity, is liable for damages or compensation ordered by a court, not the individuals who own the corporation.

The major difference between an S corporation and a C corporation lies in how income taxes are paid by the corporation and its shareholders. A C corporation is basically a standard corporation. At the end of a fiscal year for a C corporation, taxes must be paid on income and revenue by the corporation itself. The individual shareholders in a C corporation must also pay personal income taxes based on the profits they have made as shareholders in the corporation, effectively paying tax twice on the profits of the corporation.

An S corporation, on the other hand, avoids this double taxation. While the shareholders of an S corporation still pay personal taxes, the corporation itself does not pay taxes based on revenues. This means that the shareholders of an S corporation only pay taxes one time for the revenues and profits that are made by the corporation, while still afforded the personal protection from liability for the corporation. Other differences between an S corporation and a C corporation include the maximum number of shareholders for the corporation, which are restricted for S corporations, and restrictions on who can be a shareholder of an S corporation.