Formation and Ownership | One of the main differences between S corporations and C corporations is in their formation and ownership requirements. C corporations have no restrictions on the number of shareholders or the types of shareholders, meaning they can have both individual and corporate shareholders. On the other hand, S corporations are limited to 100 shareholders, and they can only have individual shareholders who are U.S. citizens or residents.

Taxation | Another significant difference between S corporations and C corporations lies in their tax treatment. C corporations are subject to double taxation, where the corporation is taxed on its profits, and then the shareholders are taxed again on any dividends they receive. This can result in higher overall taxes. In contrast, S corporations are pass-through entities. This means that the income or losses of the business "pass through" to the shareholders, who report them on their individual tax returns. This avoids double taxation, making S corporations more tax-efficient for small businesses.

Flexibility | C corporations offer more flexibility compared to S corporations. For example, C corporations can have multiple classes of stock, different voting rights for shareholders, and they can issue preferred stock. This makes it easier for C corporations to attract investors and raise capital. S corporations, on the other hand, have stricter ownership requirements and fewer options for raising capital.

Corporate Formalities | C corporations have more strict corporate formalities compared to S corporations. C corporations are required to hold regular shareholder and director meetings, keep detailed minutes, and maintain accurate corporate records. Failure to comply with these formalities can result in losing corporate protections. S corporations, while still needing to maintain certain records, have more relaxed requirements in terms of formalities.

Liability Protection | Both S corporations and C corporations provide limited liability protection for their owners, shielding them from personal liability for business debts and obligations. This means that the shareholders' personal assets are generally protected. However, it's important to note that this protection can be lost if the corporate formalities are not followed. It's always advised to consult with a legal professional to ensure proper compliance.

In conclusion, the choice between an S corporation and a C corporation depends on various factors such as the number and type of shareholders, desired tax treatment, flexibility requirements, and level of formality. It's essential to assess your specific business needs and consult with legal and tax professionals to determine which option is best for your situation.