Difference between C corporations, S Corporations, and Partnerships

Introduction

The following guide covers the various types of companies that can be formed. We will explain what each type is, what their advantages and disadvantages are, and how they operate in different circumstances.

C corporation

• A C corporation is a separate taxable entity.
• C corporations pay taxes on profits at the corporate level.
• Dividends paid to shareholders are also taxed at the corporate level.
• Interest paid on bonds issued by the corporation is also taxed at the corporate level (and not as income for investors).

S corporation

• An S corporation is a corporation that has elected to be treated as a pass-through entity for federal income tax purposes. Unlike traditional corporations, an S corporation does not pay federal income taxes itself, instead, the taxable income or loss passes through to its shareholders who report their share of profits or losses on their personal tax returns and are subject to federal income tax on them.

Advantages:

• Ease of formation — only one shareholder vote required for a liquidation or dissolution (compared with all shareholders voting in a regular corporation).
• Ownership continuity — if no distributions are made, ownership interests may be sold without triggering taxable gain (compared with c-corporations).
• Flexible dividend policy — dividends can be paid at any time and in any amount (compared with c-corporations).

Partnership

A partnership is a business entity that is not a corporation. A partnership is formed when two or more persons agree to share the profits and losses of business.

Partnerships are quite flexible, which makes them an attractive option for small businesses. However, they also have some disadvantages: For example, partnerships may be taxed twice (once at the corporate level and once as individuals), and partners can disagree over how to divide profits or make important decisions affecting the business.

Partnerships are generally not considered good vehicles for raising large amounts of capital. Because they don’t have the same legal status as corporations, they may be less attractive to investors. Also, partnerships must make all income and losses known to their partners. Favorable tax treatment — flow-through of pass-through losses, no double taxation.

Partnerships can be limited or general. A limited partnership is one in which each partner has a clearly defined role and is liable only for the amount of money he or she has invested. General partnerships are more flexible. Each partner may do any act that an individual could do, including making contracts and taking legal action.

Takeaway:

S corporations are not required to have a board of directors, but they can if they want.

In an S corporation, all shareholders (owners) have an equal say in how the corporation is run. In a C corporation, only senior executives like the CEO and CFO participate in determining corporate policies and operations.

The owner of an S corporation can choose to be taxed individually or pass through their income to their shareholders via dividends so that they’re then taxed on their personal return at ordinary rates rather than at higher rates for self-employment income.

The tax rate is based on how much profit the corporation makes. The more money the corporation makes, the higher percentage of that money they will have to pay in taxes.

The IRS requires S corporations to file an informational tax return each year to report their income and other information like deductions and losses.

Limited liability — shareholders are not personally liable for the debts or obligations of the corporation (compared with c-corporations).

In a C corporation, the company itself is taxed on its income. This means that the owners of a C corporation don’t have to pay taxes on their earnings until they take them out as distributions.

To form a partnership, the parties must sign a written agreement and file it with the secretary of state’s office. They also may have to register with the Internal Revenue Service (IRS) as self-employed individuals or sole proprietorships.

In some states, the partners must form a limited liability company (LLC) or corporation. The IRS requires partners to file Form 1065, which reports their share of the profits and losses from partnership operations.

Conclusion

We hope that this article has shed some light on the differences between these business structures. Each one has its own advantages and disadvantages, so it’s important to know which one is right for your needs before making any decisions. If you are still unsure which type of company would work best for your company, feel free to contact us.