What benefits does an S Corporation have over a C Corporation?

A subchapter S corporation is a standard corporation that has elected a special tax status with the Internal Revenue Service (IRS). S corporations carry the same benefits as C corporations, such protecting the shareholders’ (or owners’) personal assets from the debts and liabilities of the business, unlimited life and tax deductibility of certain business expenses. The primary differences between S corporations and C corporations are the way they are taxed and also the ownership restrictions imposed upon S corporations.

When deciding which entity structure is most appropriate for their business, small business owners often view the potential double taxation of profits associated with C corporations as the primary disadvantage to forming a standard corporation. With C corporations, the profits are taxed first at the corporate level, and then taxed again at the individual level if they are distributed to shareholders in the form of dividends. Shareholders must report dividends as personal income and pay taxes on that income.

Double taxation can be eliminated by completing the S corporation election with the IRS. S corporations are taxed as pass-through taxation entities, similar to general partnerships and most limited liability companies. While the profits of an S corporation are reported at the corporate level, taxes are not paid at the corporate level. Instead, the profits are passed-through to the individual tax returns of the shareholders and are taxed at the individual rate. If the S corporation reports a loss, the amount of the loss is also passed-through and reported on tax returns of the shareholders.

S-corp is kind of a simpler form of corporation. It's similar to a sole proprietorship, in that all the income/loss flows through to your individual tax return(s). But, it still has some of the legal protection that a full fledged C-Corp offers. This answer addresses US-based corps -- don't know if the story is the same anywhere else.

There are tax advantages to each depending on withholding, and if you're going to have employees on the payroll. If all you're after is shelter from liability, think about an LLC.

You should check with a lawyer, since you want to get it right the first time. The wrong decision could cost you.

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