What’s the Difference Between an S Corporation and a C Corporation?

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To understand the difference between an S Corporation and a C Corporation, let’s first discuss how corporations are formed.  All corporations are formed under state law.  When one files her articles of incorporation with the state, she does not mark a box for S Corporation or C Corporation.

The “S” and “C” are tax designations.  The Internal Revenue Service (IRS) uses the Internal Revenue Code (the Code) to determine how individuals and entities should be taxed.  The Code is a giant book that is divided into chapters and subchapters.  Subchapter S governs S Corporations while Subchapter C governs C Corporations.

If after filing the articles of incorporation the new business owner does nothing else, then her corporation will be taxed under Subchapter C.  If she wants to be taxed under subchapter S, then she must notify the IRS within a specified amount of time.  The business must also fit certain criteria to be eligible to be taxed under Subchapter S.

There are advantages and disadvantages for both types of tax designations.  Consulting with a legal professional and a tax professional is the best way to decide which tax designation is right for your business.

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