When looking to start a business in the U.S. you will quickly come across the need to decide on setting up a C Corporation or an S Corporation. This article will provide you with some background on the similarities and differences between the two and help ensure you make the best decision for you. Similarities Between C Corporations and S Corporations In many ways some of the same basic objectives and requirements exist for C Corporations and S Corporations. These similarities include: Limited Liability: The key reason many incorporate in the first place is to ensure that the owners aren’t personally liable for the debts and liabilities of the business. If the business were to fail personal assets are protected. Registration and Filing Requirements: Both types of corporations need to be registered with the state, with the same articles of incorporation and certification of incorporation being required. Separate Entities: Both C Corporations and S Corporations are considered separate legal entities once they are established. This goes a bit further than the limited liability point above and means that the corporation is considered its own entity for legal purposes. Differences Between C Corporations and S Corporations More important to your decision on a C Corporation vs. an S Corporation are the differences. These differences include: Taxation: For tax purposes a C Corporation is taxed separately and will have to file its own tax return. This is a major difference and means that once the business pays taxes another step has to take place, paying out dividends, to get earnings into the owners’ hands. This can result in a degree of double taxation as the individual will then have to pay taxes on the dividends they receive when filing their personal returns with the IRS. For tax purposes an S Corporation is not considered a separate entity but rather a flow through to the owners. An information return must still be filed by the corporation with the IRS, detailing its financial performance, but the S corporation will not actually pay taxes itself. The profits and the losses flow through to the personal tax return of the owner(s) and they report the business income themselves. This is a somewhat simplified situation as only a single actual return is filed and taxes are only paid at one level.Ownership Structure: S Corporations are limited to having 100 owners in total and as such tend to be applicable for small and medium sized businesses only. An S Corporation also cannot be owned by C Corporations, other S Corporations, Non-US citizens/residents, LLCs, partnerships or many different types of trusts. Finally, S Corporations can only have one class of stock. C Corporations have no restrictions on ownership, and as such are more applicable to medium and large businesses. What Does All This Mean To Me? When establishing a corporation you want to pick the right option the first time around, as significant costs can be incurred if you switch later. An S Corporation is appropriate if: Your business is relatively small and you don’t foresee significant growth over time. Expanding ownership is not likely and you don’t plan on selling soon (ownership limitations can limit potential buyers). You’re a US citizen or resident. You are okay recognizing the full income of the company in your personal return every year. A C Corporation is appropriate if: You see your business having broad ownership or growing rapidly. You have Non-US citizens or residents in the ownership group. Some aspect of ownership will be through another corporation or a trust. Ownership plans will require some variety in the common share classes of the business. You want to defer some taxes by retaining earnings in the company and not paying all income out immediately via dividends. You foresee potentially selling the business. Reviewing the points above when the time comes to establish a corporation can ensure you select the right corporation from the outset.