S And C Corporations In California

When people set up their company structures, one of the first decisions they have to make is choosing the best form of incorporation for their business. In California, business owners when forming a corporation have two options: S Corporations and C Corporations. While in some aspects they may seem similar, it is important to understand how their differences can shape the management of a business.

Their Similarities

Regardless of which incorporation structure is chosen, S and C Corporations share, to some extent, some of the same protections and characteristics. In the beginning, both are formed with the same Articles of Incorporation, after which future distinctions can be made. With both structures, corporations have limited liability protection. The owners of the business arenot held accountable for a company’s debts or lawsuits. Furthermore, S and C Corporations are separate legal entities, viewed as individuals by the law. The actual formation of the business is similar as well, with both having shareholders, officers, and directors. Moreover, both forms of incorporations can list their business on the stock market in order to raise capital.

Their Differences

One of the major differences between S and C Corporations is their method of taxation. A C corp is defined by its double taxation, while S Corporations have what is called pass-through taxation. C Corporations will have their profits taxed once through a Corporate Tax Return, and then again in the personal taxes of the business owners. However, S Corporations are only taxed once when the owners file their individual returns – hence the pass-through taxation. Furthermore, a business incorporated as an S corp is limited to one class of stock; however, a C corp is open to having multiple classes of stock. Finally, receiving an S corporation is limited to certain companies, which excludes banks and affiliated groups of corporations, among others.