How do C and S corporations differ?

Entrepreneurs looking to establish new businesses in New York State should understand the difference between C corporations and S corporations.

When starting a new business venture in New York, people may choose an S corporation or a C corporation as an operational structure. As explained by Entrepreneur, both models offer owners and shareholders the ability to avoid personal liability, shielding their personal assets from creditors and lawsuits. However, there are many areas in which these two models differ.

Creating the operational model

Fox Business states that a C corporation is essentially like the default when a corporation structure is chosen. In order to be recognized as an S corporation, a business must file the IRS Form 2553.

The New York State Department of Taxation and Finance states that an S corporation must meet certain criteria in order to be recognized as such. These requirements include obtaining consent from all shareholders and being recognized as an S corporation at the federal level.

Federal taxation

According to the Internal Revenue Service, an S corporation's profits and losses are passed onto individual shareholders. Taxes are then assessed at this level and will fluctuate, based upon each shareholder's tax bracket. Profits can increase a shareholder's taxable income while losses may reduce it. This approach is referred to as the flow-through method because income or loss flows from the corporation to the individual.

Taxes for a C corporation are assessed based upon the profits or losses of the corporation. No flow-through from the company to shareholders happens for these businesses.

State taxation

An S corporation is required to pay a fixed amount of tax based upon the company's receipts in the state. While C corporations must pay the metropolitan transportation business tax, S corporations do not. In addition, S corporations have the ability to earn tax credits that can be passed onto shareholders.

Other administrative differences

S corporations can choose to run their businesses on a cash method. This results in a simpler accounting process than would an accrual method. When it comes to the issuance of stock, S corporations can only issue common stock. This does limit the options for seeking additional funding in the future.

Non-resident aliens may not be shareholders of an S corporation. Shareholders in this form of business are generally individuals but can be trusts or estates. An international company may not be set up as an S corporation.

Both S and C corporations are bound be requirements to hold meetings, keep minutes, file articles of incorporation and obtain shareholder votes for major decisions.

Recommendations for entrepreneurs

Anyone wishing to establish a new company in the state of New York should consult with an attorney before finalizing on an operational model. Getting complete details about what each model offers or requires can have a big impact on the company.