About C Corporations & S Corporations

When considering a business entity, people are most familiar with the corporation. It is by far the oldest form of business entity literally going back hundreds of years. And that is one of the main reasons corporations are attractive to people interested in the formation of a business structure. Aside from the abundance of case law and precedent, the C corporation, which is the way all corporations are born, has more benefits and deductions than any other entity type. It is a separate taxpayer as well and so allows for the possibility of splitting income between it and the owners or other business entities.

The S corporation on the other hand can be elected simply by filing a form called the 2553 and is a corporation that the IRS allows to be a pass through entity and is therefore taxed at the owner(s) rate, a property which makes it a little easier and a little cheaper to maintain than the C corporation. One of its principal benefits is the reduction of self-employment tax, and so it is a very popular form of business with business owners and accountants.

The recommendation generally is for the corporation to be engaged in a traditional kind of business; I do not advise the corporation, either C or S, to hold an asset that may either appreciate or depreciate as it would generate a negative tax consequence for the company and possibly the owners. A C corporation has several different ways for double taxation to come into play, and even though an S corporation cannot be double taxed, it very often would cause higher taxation when assets are being held. Remember, as a rule of thumb, the corporation is a time tested and strong asset protection and tax reduction tool when used for a business purpose.