S Class and C Class Distinctions: How This Affects Incorporating a Small Business

In terms of conducting a small business and liability for the owners, S Class corporations and C Class corporations are basically identical. An S Class has additional requirements such as limiting the number of shareholders (maximum 75), who may be a shareholder, and limiting the company’s stock to only 1 class of common stock. S corporations are required to use the calendar fiscal year, while the C class corporation can predetermine its fiscal year. The main difference between these 2 types of corporations is the way in which they are taxed. A C corporation is required to file tax returns as a separate legal entity. An S corporation does not have this requirement. The profits and losses are “passed through” to the owners of the company, who must report these on their personal tax return. This prevents earnings paid out as dividends to the owners from being paid twice, but can cost more in taxes to the individual if he or she is moved to a higher tax bracket. For more information about S class corporations, C class corporations and incorporating a small business, please contact us.