Choosing a Business Entity: S-Corporation vs. C-Corporation

This is an excerpt from a presentation I give to college students and to prospective entrepreneurs about types of business entities.

A college professor (who’s also an attorney) told me that my presentation on this subject is the best, clearest and most-concise overview of the topic that she’s ever seen.

I’m flattered by the compliment, and will try to translate those positives into a series of blog posts.

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For people unfamiliar with tax law — which is most people — the terms S-corporation and C-corporation can be confusing.

Here’s the best way to look at what these terms mean.

• C-corporation refers to corporations that are taxed under subchapter C of the Internal Revenue Code
• S-corporation refers to corporations that are taxed under subchapter S of the Internal Revenue Code

I’ll get into specifics of what that means in my next two posts on this subject.

For now, let’s talk about how a corporation is formed.

All corporations start with articles of incorporation. When a corporation is formed, by default it is taxed as a C-corporation. A corporation can elect to be taxed as an S-corporation by filing paperwork with the IRS.

For legal purposes, there is no such thing as a C-corporation or an S-corporation. A corporation is a corporation. The “C” and “S” refer to how that corporation is taxed, not to its legal standing.

Now that we’ve got this basic overview out of the way, the next couple of posts will be about the specifics of taxation of C-corporations and S-corporations.