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The two most popular ways to set up a new small business is to set it up as either a C Corporation or an S Corporation. Choosing between these two is not a decision that you want to make lightly and it’s important for you to understand the big differences between them.

A C corporation is a standard business entity and the more common option between the two. An S corporation is similar to a C corporation, but it is owned by shareholders who make the high level decisions about the business.

Here are the three primary differences between a C Corp and an S Corp for your new business:

1. Ownership

The first big difference between a C corp and an S corp is who owns them. C corps are more flexible because they can have any number of owners, while S corps need to have at least one hundred shareholders. In addition, each of those shareholders need to be a United States citizen and resident. Many people prefer a C corporation because they are less rigid in this regard.

2. Taxes

Another critical difference between C corps and S corps is in how they are taxed. The profits of a C corporation need to be reported on a corporation tax return. After tax profits will then be distributed to the shareholders in the form of dividends, which are taxes again and reported by each individual shareholder.

This is sometimes referred to as ‘double taxation,’ and it’s why many people will opt for an S corporation, which is treated like a sole proprietorship or partnership. The profits or losses of the company will then be passed down to the shareholders, each of whom will need to report those profits or losses on their own personal returns.

3. Shareholder’s Rights

The third and final difference between S and C corps has to do with shareholder’s rights. Both corporations are structured similarly in that both have shareholders at the top.

But the difference is that S corporations are limited to only having one type of stock (and thus one top of shareholder). There are absolutely no differences between the shareholders of the business, which means that all shareholders have equal voting rights.

C corporations, meanwhile, can have different levels of stocks and shareholders. The voting rights of the shareholders will be divided based on the different classes for stocks. This means that the vote of certain shareholders will count more than others in a C corporation (with the founders and early owners tending to have the most votes and thus the most control over the company as a whole).

C Corp vs. S Corp

All in all, these are the three primary differences between a C and S corporation that you will need to be aware of before you decide which path is right for your small business. Neither is necessarily better than the other and it comes down to what is more convenient for your situation.

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