When starting a small business, it is important to carefully consider which type of entity you want to operate under. There are several options; including sole proprietorships, partnerships, limited liability companies (LLCs) and corporations. If you decide to go with a corporation, it can be set up as a C-Corporation or S-Corporation. C-Corps and S-Corps have a lot of similarities, but there are some clear differences.

Here some are the ways in which they are similar:

Both are Separate Entities: Both C-Corps and S-Corps are legally separated entities that are independent of the owners and shareholders. As such, owners bear no personal responsibility for the debts and liabilities of the corporation.

Similar Structure: Both entities operate under a similar power structure in which shareholders elect a board of directors, who in turn appoint managers to oversee the day-to-day operations of the company.

Similar Legal Requirements: Both entities have certain legal requirements; such as drafting and filing articles of incorporation, issuing stock, drafting and publishing bylaws, and holding shareholder and board meetings.

Here are some of the major differences between an S-Corp and C-Corp:

Ownership: C-Corps offer much greater flexibility in regards to ownership; they are allowed to have an unlimited number of shareholders, and these shareholders can be other corporations, trusts, foreign citizens, and almost any other type of individual or legal entity. S-Corps are limited to 100 shareholders, and shareholders can only be individual U.S. citizens and certain types of estates, trusts and other special organizations. In addition, an S-Corp must have originated in, and be based in, the United States.

Stock Issuance: C-Corps also enjoy greater flexibility in how they issue stock; they can issue common stock, cumulative stock, callable stock, convertible stock, and any other type of preferred stock. S-Corps are only allowed to issue common stock, which can make it more difficult to attract investors when they need an infusion of capital.

Taxes: The major advantage to S-Corps is the way they are taxed. C-Corps are subject to “double taxation”; meaning corporate profits are taxed at the federal and state corporate tax rate, then the profits are taxed again when distributed to shareholders as dividends. With an S-Corp, profits are “passed through” directly to the shareholders free of corporate tax, so shareholders are only subject to the dividend tax.

For many small businesses, particularly those that are family-owned or closely held, S-Corps make sense because there is little concern about the 100 shareholder restriction, and there are major potential tax advantages. On the other hand, if your company is planning to expand, grow and perhaps try to attract investors, you may be better off with a C-Corp. For additional details on the advantages and disadvantages of each, speak with a local tax professional.