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Type S and C Corporations:Tax Advantages and Disadvantages

Updated on March 6, 2013

Two types of corporations are S and C. They both have advantages and disadvantages according to the tax code.

An S corporation would be a wise choice for those that would like to save themselves from double taxation, family owned businesses could especially take advantage of this type of corporate set-up. Instead of being taxed as a corporation and then again on the taxpayer level, shareholders in this type of corporation only gets taxed on an individual level by claiming profits and losses. S corporations are taxed like a partnership, with the earnings going through the company, right to each individual shareholder personally. Some disadvantages to the S corporation is the criteria that must be met to be organized in this way and to stay eligible. The company must have less than 100 shareholders, be domestic, shareholders must be citizens or resident aliens and they can only issue one type of stock. If any of these instances are not met, the company can no longer file taxes in this way.

An C corporation is of the regular structure and is taxed at a flat rate depending on the profit for the year. This can be an advantage, because then a person knows exactly what they will be taxed. A C corporation also has special deductions that an S corporation is not privy to, such as organizational expenditures and dividends paid out to their shareholders. Another big advantage to this type of corporation structure is that the company is a legal entity in itself and owners and shareholders can not be held liable beyond the amount that is put into the company. Disadvantages are many and the number one being the risk of double taxation, meaning taxed once at the corporate level and then again when they claim the profit as an income. This can be a huge disadvantage for owners of this type of stock, but in larger corporation, there is no way to get around it. If the company does any business out of state, they lose their eligibility to use the more tax friendly corporation type S.


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