Here are the basics:
Class C Corporations are taxed as a separate entities. The have to report profits and losses on a corporate tax return. Shareholders are not taxed on the corporation's profits because the C Corp pays corporate taxes. C Corp shareholders only report and pay income taxes only on what they are paid by the corporation, for instance on dividends (even though the corp has paid corporate income taxes). This is commonly referred to as “double taxation”, and is avoided with an S Corporation (as a pass-through tax entity).
An S Corp files K-1 tax return (informational only because the taxes are paid by the individuals) if it has more than one shareholder. Taxes are paid at the individual's personal tax rate. S Corp shareholders are also allowed to offset other income by including their share of the S corporation’s losses on their personal tax.
So unless you're a large company with dozens or hundreds+ shareholders, usually an S Corp is the way to go.
Good answer already. All corporations are C-corp at the time they are created. C and S are shorthand for provisions in the Internal Revenue Code and have nothing to do with the law governing the actual creation of a corporation under Texas law. You have to file a form with the IRS to "elect" to be taxed as an S-corp. and you have to do it within 75 days of chartering to get it for that year. Not every corporation qualifies for S-corp status. Also, the business organization of choice these days is a limited liability company rather than a corporation. That is the default position for most business lawyers unless there is some reason not to. The S-corp election is available to it as well but there is an extra hoop to jump through. My point is that establishing a business entity is a decision with a lot of options and choices and you are not likely to know that they are even there without the advice of an experienced business lawyer and a good CPA. Go consult with them before you do something. The internet is not a substitute for specific legal advice. If you can afford to start a new business, you can afford some professional advice.
DISCLAIMER: This is not specific legal advice and does not establish an attorney/client relationship.
There are certain tax advantages to forming an S corp. which are not available to C corps, or LLC's that do not elect S status. Specifically,shareholder draws form an S corp. are not subject to self-employement tax if the shareholder is employed by the S corp, and has a reasonable salary.
Phillip M. Smith Jr.
Los Angeles Tax & Business Attorney
Licensed in the United States Tax Court
Call: 323-292-4116 or 562-505-1004
THESE COMMENTS ARE NOT LEGAL ADVICE. They are provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction. The answer to question does not create an attorney-client relationship or otherwise require further consultation. Mr. Smith is licensed to practice law throughout the state of California with offices in Los Angeles County. He is authorized to handle IRS matters throughout the United States, and is also licensed to practice before the United States Tax Court. His phone number is 323-292-4116 or his email address is email@example.com.