Image courtesy of Pixabay.com

Image courtesy of Pixabay.com

A C-corporation is a tax term referring to one of two ways a corporation can be taxed.

Tax Terminology

The terms “C-corp” and “S-corp” have meaning in the tax world.

For legal purposes, there’s no such thing as a C-corp or an S-corp. For legal purposes, there’s just a “corporation.”

The “C” and “S” refer to subchapters¬†of the Internal Revenue Code that cover corporate taxation.

C-corporations are taxed under Subchapter C, while S-corporations are taxed under Subchapter S.

Election

When a corporation is formed it is taxed as a C-corporation by default, but it can elect to be taxed as an S-corporation.

LLCs are not corporations (the “C” stands for “company”) but they can elect to be taxed as either a C-corp or as an S-corp.

Differences Between C- and S-

The differences between C-corps and S-corps are difficult to get into in these glossary entries, which are intended to be basic overviews. But here’s a sampling of the differences:

  • S-corporations share many of the same characteristics as partnerships. S-corporations themselves do not pay income tax. Instead, the end result of S-corp operations pass through to the shareholders, who are taxed on their share of corporate profit.
  • C-corporations exist as completely separate entities from the shareholders. The end result of corporate operations stay within the corporation, and the corporation pays income tax itself.