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What is the difference between an S and C corporation?

On Behalf of | Mar 18, 2022 | Business & Corporate Law

If you want to incorporate your company in Florida, there are a few types of corporations to choose from. An S corporation is a pass-through entity, which means it doesn’t pay taxes on income. It pays a salary to employees and individual income tax on the salary. C corporations are the standard corporation you may think of that pays corporate taxes.

Limitations of an S corporation

Business and corporate law only allow US residents to be shareholders of an S corporation. An S corporation can have up to 100 shareholders as well. If you intend to have any non-American shareholders or over 100 shareholders, then you’ll have to set up a C corporation. There are some limitations on what types of business qualify for S incorporation, so you should check corporate law to know if it’s possible in your situation.

The salary that you pay yourself must be “reasonable compensation.” Reasonable compensation is how much you would pay another employee to do the work you do. You should look up the salaries of people in your role with your level of experience to know how much to pay yourself.

Benefits of an S corporation

Setting up an S corporation is a great way to reduce your self-employment taxes. The government taxes it as any other employee. There isn’t a self-employment tax for this type of taxation.

Limitations of a C corporation

You must pay corporate taxes and individual income taxes as a C corporation. Some refer to this as double taxation. This type of taxation may not make sense for smaller companies. Large companies often find it the better deal because of a lower corporate tax rate and corporate tax breaks.

Benefits of a C corporation

You can have an unlimited number of shareholders and international shareholders with a C Corporation. This type of business structure is also the most attractive to investors. If you plan on selling the business in the future, setting it up as a C corporation is helpful to make it more desirable to buyers.

Your decision between an S corporation and a C corporation may be automatically made for you if your company will have international shareholders or more than 100 shareholders. Aside from that, the next biggest determining factor is the size of the business. C corporation taxation is often friendlier to large businesses.