When you’re in the process of legitimizing your startup, it’s easy to get swept up in the jargon and not fully understand the difference between the entities. You might be familiar with LLCs and corporations, but what about everything else that comes after that like the B Corp., C Corp. and S Corp.? What’s the difference?
In order to understand the difference, first we have to make a distinction between legal versus tax entities. Legal entities are the aforementioned LLCs and corporations that classifies how everyone, from the state to partners, sees the business. C Corps and S Corps are tax entities, which is how the IRS and state taxing board see the business. B Corps have their own special set of specifications, outlined entity by entity.
Below, we cover what each corporation is and how the structure aids your business.
What it is: The shortened abbreviation for a Benefit Corporation (also known as a B Corp.) is actually not a tax entity but a legal entity. Incorporating as a B Corp. means becoming a for-profit corporate entity that aims to create a positive impact on society, community and the environment while making a profitable return on investment.
How the entity aids to your business: Becoming a B Corp. extends beyond filing paperwork. The entity is held to a much higher standard and any entrepreneur filing as one for their business must meet a performance requirement first. As a B Corp., you’re committing to higher standards of purpose, transparency and accountability. Much like a traditional corporation, when making a decision, you have to consider how it will affect the business, but you are also required to take in how that decision will impact the environment and society.
What it is: Essentially, every corporation starts off as a C Corp., which is an organization structure that provides non-tax benefits with profits taxed separately from its owners. The difference between a C Corp. and an S Corp. is the double tax, where any gains or profits made by the company that are distributed to shareholders are taxed twice.
How the entity aids to your business: Both in control and management, a C Corp. is a separate entity from its owners. This means they can do a number of things including engaging in business, raising investment capital and going public. Forming a C Corp. also means you aren’t personally liable for any debts that your corporation incurs, you can write off company benefits (such as health and dental insurance) as business expenses, and your company is at much less risk of being audited by the government.
What it is: An S Corporation is a C Corporation with an S Corporation tax election. What does that mean, exactly? As previously noted, every corporation starts off as a C Corp., before the owner elects to make it an S Corp., which entails filing for S Corp. status with the IRS. By fulfilling the necessary requirements and filing for an S Corp., you are telling the government that you want to be taxed as a partnership instead of a corporation. Unlike a C Corp., which is faced with double taxation, an S Corp. bypasses that area using pass through taxation.
How the entity aids to your business: Let’s go back to pass through taxation for a moment. While S Corps do not pay federal income taxes at the corporate level, pass through taxation allows their profits, losses and all other activities to be passed along to the company shareholders to avoid double taxation. You’ll still have to pay personal income taxes and you and your shareholders must be paid a reasonable compensation, but this means you won’t have to worry about anyone touching your corporate income. Remember that this is only guaranteed at a federal level and it’s always a good idea to check in with your state to see if they’re on board with pass through taxation.
Ultimately, no matter what kind of company you’re running, there’s a wealth of legal and tax entities available to choose from. If you want to make a difference in society and the environment while earning a profit, incorporating as a B Corp. might just be your best bet. If you want to keep the tax entity separate from the legal one, opt for a C Corp. If you don’t want to pay income tax twice, but still want to raise money by selling a limited amount of shares, filing an S Corp. may be the best bet for your small business.