S-Corporation

At least as it pertains to taxation by the IRS, S-Corporations are not taxed the same as C-Corporations. The S-Corporation will generally file its’ annual tax return by filing Form 1120S while the C-Corporation will use the straight 1120 form. The 1120S is seen more as an informational return, as it only informs the IRS of the profits and losses of the S-Corporation; identifies who the shareholders are that will be profiting from the distribution of income; and the proportion in which the shareholders will receive such distribution of income. The IRS will not expect a payment nor will it issue a refund based upon the filing of an 1120S as an S-Corporation is not an independent tax-paying entity because of its’ “flow through” tax status. The profits and losses of an S-Corporation are instead distributed to the shareholders in proportion of their ownership interest in the S-Corporation. Thus, while the S-Corporation is required to file an informational return, the actual profits of the S-Corporation are not taxed until such time as the individual shareholders file their annual taxes.

Limited Liability Company

The LLC, like the S-Corporation, is a “pass-through entity” for tax purposes. Unlike the S-Corporation, the LLC is treated as a disregarded entity while its’ tax treatment depends upon the number of its’ members. A single member LLC is taxed like a sole proprietorship while an LLC with more than one member is taxed as though it is a partnership. One advantage of an LLC is that, if it makes the election, it can choose to be taxed as an S-Corporation or a C-Corporation if it is determined that the benefits of one is greater than the other. This allows extreme flexibility in how profits are distributed and gives the business owner(s) a variety of ways so that they can determine what will ultimately be most advantageous without being under any obligation to modify the corporate form.

C-Corporation

All corporations are C-Corporations upon filing with the Secretary of State. A C-Corporation does not become an S-Corporation until certain filings are made with the IRS.

A C-Corporation will file a full corporate tax return and will pay taxes on corporate profits. After tax income is then distributed to the shareholders of the corporation in the form of dividends. Once the distribution of corporate profits is made, the shareholders are then taxed on those dividends, meaning the owners of the corporation are double taxed as they must pay taxes once on corporate earnings and again on the distribution of dividends.

It is important to note that corporate tax rates are typically lower than individual tax rates at both the Federal and State level. Companies that have retained earnings often end up paying less overall taxes than they otherwise would have as a pass-through entity.