How S-Corporation differs from C-Corporation?

Characteristics of a C Corporation and an S Corporation:

Some basic but important features are discussed below to understand the difference between the  two entities which are C Corporation and S Corporation.

• One of the first things that those forming an S Corporation find most appealing is that those with S Corporation status are not required to pay both corporate and individual income taxes. However it is only fair to note that because the shareholders are not subject to double taxation, they may end up paying a higher personal income tax rate. When total taxes are considered over the course of the year, both on the corporate and on the individual level, those belonging to an S Corporation almost always end up paying fewer income taxes.

• In the Sub Chapter S Corporation, The Internal Revenue Service charges penalties and interest to each stockholder which can be significant.

• Employment tax rules are also favorable under an S Corporation versus a C Corporation. In Corporations such as the S Corporation where shareholder-employees are in smaller numbers, it is possible for all of the corporation's profits to be extracted in the form of a salary that is paid. This means that the corporation can pay out its profits in the form of wage increases or bonuses at the end of the year, making the taxable amount for income zero.

• A reasonable payroll is required in either S Corporation and C Corporation

• A C corporation has a lower tax bracket compare to an S corporation, because the S corporation stockholders report income on the Income Tax Return, whereas C Corporation is not a pass through entity.

• S Corporation report income on the IRS form 1120S, whereas the C Corporation uses the IRS form 1120 to report the income.

• The S Corporation issue form K1 to all the stockholders whereas the C Corporation does not.