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Understanding C Corporations and S Corporations: Pros, Cons, and Examples

Types of Corporations (C Corp, S Corp)
  • C Corporation (C Corp): A standard corporation subject to corporate income tax.
  • S Corporation (S Corp): A special type of corporation that allows profits (and some losses) to be passed directly to the owners’ personal income without being subject to corporate tax rates.
Pros and Cons
Pros:
  • Limited liability protection.
  • Ability to raise capital through stock sales.
  • Perpetual existence.
Cons:
  • Complex and expensive to establish and maintain.
  • Double taxation for C Corps (corporate and personal tax on dividends).
  • Regulatory and compliance requirements.
Real-World Examples
Example: John’s software company is structured as a C Corp. This allows him to attract investors by selling shares of the company. However, the company faces double taxation on profits, which is a significant consideration for John when distributing dividends.