3 posts tagged with "C Corp"

When starting a business, one of the most important decisions you'll make is choosing the right business structure. Among the various options available, the C corporation stands out as a popular choice for companies planning to grow significantly or raise capital from investors.

In this guide, we'll walk you through everything you need to know about C corporations, helping you determine if this structure is right for your business.

What Exactly Is a C Corporation?​

A C corporation (often shortened to "C corp") is a legal business entity that exists separately from its owners. This separation is more than just paperwork—it creates a distinct legal entity that can own property, enter contracts, sue, and be sued independently of its shareholders.

In a C corporation, the business is owned by shareholders who purchase stock in the company. These shareholders elect a board of directors, who are responsible for making major business decisions and overseeing the company's strategic direction. The board then appoints officers and executives to handle day-to-day operations.

One of the defining characteristics of a C corporation is how it's taxed. The IRS treats C corps as separate taxpayers, meaning the corporation itself pays taxes on its profits at the corporate tax rate. This is different from pass-through entities where business income flows directly to the owners' personal tax returns.

C corporations can be either publicly traded (like Apple or Microsoft) or privately held. Publicly traded corporations sell shares on stock exchanges and must disclose detailed financial information to the public. Privately held C corps keep their shares within a limited group of investors and face fewer disclosure requirements.

C Corporation vs. S Corporation: What's the Difference?​

Many business owners get confused about the difference between C corporations and S corporations. Here's the key distinction: they're taxed differently.

By default, all corporations start as C corporations. However, eligible corporations can elect "S corporation" status with the IRS, which changes how they're taxed.

The main difference is in how profits and losses are handled:

C Corporations: The corporation pays corporate income tax on its profits. When those after-tax profits are distributed to shareholders as dividends, shareholders pay personal income tax on those dividends. This creates what's known as "double taxation."

S Corporations: Profits and losses pass through directly to shareholders, who report them on their personal tax returns. The corporation itself doesn't pay federal income tax, avoiding double taxation.

However, S corporation status comes with restrictions. You can only have up to 100 shareholders, they must be U.S. citizens or residents, and you can only issue one class of stock. C corporations face no such limitations.

Both LLCs and C corporations can elect S corporation status if they meet the requirements, giving business owners flexibility in choosing their tax treatment.

Why Choose a C Corporation? Key Benefits​

Despite the complexities, many business owners choose the C corporation structure for good reasons. Here are the main advantages:

Unlimited Capital Raising Potential​

C corporations have unparalleled ability to raise capital. You can sell stock to an unlimited number of investors, both domestically and internationally. You can also issue multiple classes of stock—such as common stock with voting rights and preferred stock with special dividend preferences.

This flexibility makes C corps the preferred structure for startups seeking venture capital or companies planning to go public eventually. Investors are familiar with C corps, and the structure accommodates sophisticated investment terms that venture capitalists typically require.

Strong Personal Liability Protection​

When you operate as a sole proprietor or partnership, there's no legal separation between you and your business. Your personal assets—your home, car, savings—are at risk if the business faces lawsuits or debts.

A C corporation provides a liability shield. The corporation's assets are separate from your personal assets. If the business is sued or can't pay its debts, creditors generally can't go after your personal property (assuming you've maintained proper corporate formalities and haven't personally guaranteed business obligations).

This protection is particularly valuable for businesses in high-risk industries or any company that wants to protect its owners from business liabilities.

Perpetual Existence​

C corporations don't depend on any single owner to continue existing. If a shareholder dies, retires, or sells their shares, the corporation continues operating seamlessly. Ownership simply transfers to new shareholders.

This perpetual existence makes C corps attractive for building long-term enterprises. You can create a business that outlasts you, building institutional value that isn't tied to any individual. It also makes ownership transfers cleaner—shareholders can buy and sell stock without dissolving and reforming the entire business entity.

Enhanced Credibility​

Many investors, partners, and customers view corporations as more established and credible than other business structures. The formal structure and regulatory requirements signal that you're running a serious enterprise.

Tax-Deductible Benefits​

C corporations can offer employees (including shareholder-employees) benefits that are tax-deductible to the corporation but not taxable to the employee. These include health insurance, life insurance, and other fringe benefits. In some cases, these tax advantages can offset the double taxation issue.

The Downsides: What You Need to Know​

C corporations aren't right for every business. Here are the main disadvantages to consider:

Higher Formation and Maintenance Costs​

Starting a C corporation costs more than forming a sole proprietorship or partnership. You'll pay filing fees when you file articles of incorporation (typically ranging from $100 to$800 depending on your state), and you may want to hire an attorney to ensure everything is done correctly.

Ongoing costs are also higher. Many states charge annual franchise taxes or report fees. You'll need to keep detailed records, hold regular meetings, maintain corporate minutes, and file separate corporate tax returns. These requirements often mean higher accounting and legal fees.

Extensive Regulatory Compliance​

C corporations face more regulations than simpler business structures. You must:

• Hold regular board meetings and shareholder meetings
• Keep detailed minutes of all meetings
• Maintain thorough financial records
• File annual reports with the state
• Follow corporate bylaws and formalities
• Comply with securities laws if selling stock

Failing to maintain these formalities can lead to "piercing the corporate veil," where courts disregard the liability protection because you haven't treated the corporation as a separate entity.

Double Taxation​

This is the most commonly cited disadvantage of C corporations. The corporation pays taxes on its profits at the corporate rate (currently 21% at the federal level). When it distributes those after-tax profits to shareholders as dividends, those shareholders pay personal income tax on the dividends (up to 20% for qualified dividends, plus potential net investment income tax).

For example, if your corporation earns $100,000 in profit:

• The corporation pays $21,000 in corporate tax, leaving$79,000
• If distributed as dividends and you're in the top bracket, you might pay $15,800 more
• Total tax burden: $36,800 (36.8%)

Some businesses work around this by paying out profits as salaries instead of dividends, but the IRS scrutinizes excessive compensation and may reclassify it.

Not Ideal for All Business Types​

The complexity and costs of C corporations make them less suitable for small businesses without plans for significant growth or outside investment. If you're running a local service business or don't plan to raise substantial capital, simpler structures like LLCs or S corporations may serve you better.

How to Form a C Corporation: Step-by-Step​

If you've decided a C corporation is right for your business, here's the formation process:

1. Choose Your Business Name​

Select a name that complies with your state's corporate naming requirements. Most states require corporate names to include "Corporation," "Incorporated," "Company," or an abbreviation like "Corp.," "Inc.," or "Co."

Check your state's business registry to ensure the name isn't already taken. You may also want to check domain name availability if you'll need a website.

2. Appoint Directors​

Decide who will serve on your initial board of directors. Most states require at least one director, though some require three. Directors can be shareholders but don't have to be.

3. File Articles of Incorporation​

Submit your articles of incorporation (sometimes called a certificate of incorporation) to your state's business filing office, usually the Secretary of State. This document typically includes:

• Your corporation's name and address
• The purpose of the corporation
• Names and addresses of directors
• Information about stock (authorized shares, par value, stock classes)
• Name and address of your registered agent

You'll pay a filing fee, which varies by state but typically ranges from $100 to$800.

4. Get an Employer Identification Number (EIN)​

Apply for an EIN from the IRS. This is essentially a social security number for your business. You'll need it to open bank accounts, hire employees, and file taxes. You can apply for free on the IRS website.

5. Create Corporate Bylaws​

Draft bylaws that govern how your corporation will operate. Bylaws typically cover:

• How directors and officers are elected
• Meeting requirements and procedures
• Shareholder rights and responsibilities
• How to amend the bylaws

You don't file bylaws with the state, but keep them with your corporate records.

6. Hold Your First Board Meeting​

Conduct an organizational meeting where directors:

• Adopt the bylaws
• Elect corporate officers
• Authorize the issuance of stock
• Approve initial business decisions

Document everything in your meeting minutes.

7. Issue Stock​

Issue stock certificates to your initial shareholders. Keep a stock ledger recording who owns what shares. Even if you're the only shareholder, maintain proper documentation.

8. Obtain Licenses and Permits​

Research and obtain any business licenses and permits required for your industry and location. This might include:

• General business licenses
• Professional licenses
• Sales tax permits
• Health department permits
• Zoning permits

Requirements vary greatly depending on your business type and location.

9. Maintain Compliance​

After formation, maintain good standing by:

• Holding annual meetings
• Keeping detailed records
• Filing annual reports with your state
• Paying required fees and taxes
• Following your bylaws
• Keeping corporate and personal finances separate

Is a C Corporation Right for Your Business?​

A C corporation makes sense if you:

• Plan to seek venture capital or outside investment
• Want to eventually go public
• Need to raise capital from a large number of investors
• Want to offer stock options to attract top talent
• Operate in a high-liability industry
• Plan to build a business that will outlast the founders
• Anticipate keeping profits in the business rather than distributing everything to owners

A C corporation may not be the best choice if you:

• Run a small local business without expansion plans
• Want to minimize complexity and costs
• Plan to distribute most profits to owners (double taxation becomes expensive)
• Want pass-through taxation
• Have only a few owners who are all U.S. citizens (S corp might be better)

Final Thoughts​

Choosing the right business structure is a crucial decision that affects your taxes, liability, fundraising ability, and administrative burden. The C corporation offers powerful advantages—particularly for businesses with growth ambitions—but comes with added complexity and costs.

Before making your decision, consult with a business attorney and accountant who understand your specific situation. They can help you evaluate whether a C corporation, S corporation, LLC, or another structure best serves your goals.

Remember, your choice isn't permanent. Many businesses start as LLCs or sole proprietorships and later convert to C corporations as they grow and their needs change. The key is choosing the structure that makes sense for where you are today and where you're headed tomorrow.

Choosing the right business structure is one of the most critical decisions you'll make as an entrepreneur. This choice affects everything from your tax obligations and personal liability protection to your ability to raise capital and attract investors.

For most early-stage business owners, the decision comes down to two popular options: forming a C Corporation (C Corp) or a Limited Liability Company (LLC). Each structure offers distinct advantages and trade-offs that can significantly impact your business's trajectory.

This comprehensive guide will help you understand the fundamental differences between C Corps and LLCs, enabling you to make an informed decision that aligns with your business goals.

Understanding C Corporations​

A C Corporation is a legal business entity that exists separately from its owners. This separation is more than just a legal formality—it has profound implications for taxation, liability, and corporate governance.

How C Corps Work​

When you form a C Corp, the business becomes its own taxpayer. The corporation files its own tax returns and pays corporate income tax on its profits. When those profits are distributed to shareholders as dividends, the shareholders then pay personal income tax on those dividends. This creates what's commonly known as "double taxation."

C Corps must maintain a formal structure with a board of directors elected by shareholders. The board oversees major corporate decisions and ensures the company operates in the shareholders' best interests. Regular meetings, detailed record-keeping, and formal bylaws are mandatory requirements.

Forming a C Corporation​

To establish a C Corp, you'll need to:

1. Select a unique business name that complies with your state's naming requirements
2. Choose your state of incorporation (Delaware is famously popular due to its business-friendly laws)
3. File articles of incorporation with your chosen state
4. Create corporate bylaws outlining governance procedures
5. Hold an organizational meeting to elect directors and adopt bylaws
6. Issue stock certificates to initial shareholders
7. Obtain an Employer Identification Number (EIN) from the IRS
8. Register for state taxes and obtain necessary business licenses

Benefits of C Corporation Structure​

Strong Liability Protection

The corporate veil protects shareholders' personal assets from business debts and legal judgments. If the corporation faces lawsuits or bankruptcy, creditors generally cannot pursue shareholders' personal property, homes, or bank accounts.

Unlimited Growth Potential

C Corps can issue multiple classes of stock, making them attractive to venture capital firms and angel investors. There's no limit on the number of shareholders, and you can easily raise capital by selling equity stakes in your company.

Attractive to Investors

Venture capitalists and institutional investors strongly prefer investing in C Corps. The structure provides clear ownership percentages, straightforward exit strategies, and tax benefits for certain types of investors.

Employee Incentives

C Corps can offer stock options and equity compensation packages to attract top talent. These incentive structures are well-established, widely understood, and can be powerful tools for recruiting and retention.

Tax Benefits on Reinvested Profits

While C Corps face double taxation on distributed profits, money reinvested in the business is only taxed once at the corporate level. The current corporate tax rate of 21% can be advantageous compared to personal income tax rates for high-earning business owners.

Perpetual Existence

A C Corp continues to exist even when shareholders change, directors resign, or founders leave. This continuity makes long-term planning easier and provides stability for employees, customers, and partners.

Drawbacks of C Corporation Structure​

Double Taxation Challenge

The most significant disadvantage is paying taxes twice on the same income. First, the corporation pays federal corporate income tax on profits. Then, when those profits are distributed as dividends, shareholders pay personal income tax. This can substantially reduce the net income received by owners.

Complex and Costly Formation

Incorporating as a C Corp involves considerable paperwork, legal fees, and filing costs. Ongoing compliance requires maintaining detailed records, filing annual reports, and adhering to corporate formalities that can be time-consuming and expensive.

Regulatory Burden

C Corps face strict regulations and ongoing compliance requirements. You'll need to hold annual shareholder meetings, maintain detailed minutes, file annual reports with the state, and comply with securities regulations if you have multiple investors.

Less Operational Flexibility

The formal structure that provides benefits can also create rigidity. Major decisions often require board approval, shareholders must be notified of significant changes, and the decision-making process can be slower than in more flexible structures.

Understanding Limited Liability Companies (LLCs)​

An LLC combines elements of corporations and partnerships, creating a flexible business structure that has become increasingly popular among entrepreneurs.

How LLCs Work​

LLCs provide liability protection similar to corporations while maintaining the tax treatment of partnerships or sole proprietorships. The business itself isn't taxed—instead, profits and losses "pass through" to the owners' personal tax returns.

Members (LLC owners) report business income on their personal returns and pay taxes at their individual rates. This avoids the double taxation issue that affects C Corps.

Forming an LLC​

Creating an LLC is generally simpler than incorporating:

1. Choose a business name that meets state requirements
2. File articles of organization with your state
3. Pay the required state filing fee (varies by state)
4. Create an operating agreement (recommended even if not required)
5. Obtain an EIN from the IRS
6. Register for state taxes and obtain necessary licenses

Unlike C Corps, LLCs don't require a board of directors, formal annual meetings, or extensive corporate governance structures.

Benefits of LLC Structure​

Liability Protection Without Corporate Complexity

LLC members enjoy personal asset protection similar to corporate shareholders, but without the burdensome corporate formalities. Your home, car, and personal savings are shielded from business liabilities.

Pass-Through Taxation

The LLC itself doesn't pay federal income taxes. Instead, profits flow through to members who report their share on personal tax returns. This eliminates double taxation and often results in lower overall tax obligations.

Qualified Business Income Deduction

LLC owners may qualify for a 20% deduction on qualified business income under current tax law, potentially reducing their tax burden even further.

Management Flexibility

LLCs can be member-managed (owners run the day-to-day operations) or manager-managed (owners appoint managers). You can structure decision-making however works best for your business without rigid corporate formalities.

Simple Formation and Maintenance

Forming an LLC requires less paperwork and lower costs than incorporating. Ongoing compliance is also simpler—most states only require an annual report and fee.

Flexible Profit Distribution

While C Corps must distribute profits in proportion to share ownership, LLCs can allocate profits and losses any way members agree upon in the operating agreement.

Varied Ownership Options

LLCs can be owned by individuals, other LLCs, corporations, or even foreign entities. Single-member LLCs are also permitted in all states.

Drawbacks of LLC Structure​

Self-Employment Tax Obligations

LLC members typically must pay self-employment taxes (15.3% for Social Security and Medicare) on their entire share of profits. In a C Corp, only salaries are subject to these taxes, not dividends.

Limited Investment Appeal

Venture capital firms and many institutional investors prefer C Corps. If you plan to raise significant capital or eventually go public, an LLC structure may complicate or limit your funding options.

Ownership Transfer Complexity

Adding new members or transferring ownership interests in an LLC usually requires consent from existing members and amendments to the operating agreement. This makes ownership changes more cumbersome than simply selling stock.

Varied State Regulations

LLC laws differ significantly from state to state. If you operate in multiple states, you'll need to navigate different regulations, filing requirements, and fees for each jurisdiction.

Potential Dissolution Issues

In some states, LLCs may be dissolved when a member leaves, dies, or goes bankrupt unless the operating agreement specifically addresses continuity. This can create uncertainty for long-term planning.

Limited Life Span

While C Corps have perpetual existence, LLCs may have a limited lifespan depending on state law and the terms of the operating agreement.

Making the Right Choice for Your Business​

Your decision between a C Corp and LLC should be driven by your specific business goals, growth plans, and circumstances.

Choose a C Corporation If You:​

• Plan to raise venture capital or seek significant outside investment
• Intend to eventually go public through an IPO
• Want to offer stock options to employees
• Expect to retain significant profits in the business for reinvestment
• Prefer a well-established corporate structure with clear roles
• Plan to build a high-growth company with potential for acquisition

Choose an LLC If You:​

• Want to avoid double taxation
• Prefer operational flexibility and minimal bureaucracy
• Plan to distribute most profits to owners rather than reinvesting
• Have a small group of owners who agree on business direction
• Don't anticipate needing venture capital funding
• Want simpler formation and ongoing compliance requirements
• Run a service-based or small-scale business

Can You Change Your Mind Later?​

Yes, but with conditions. Converting from an LLC to a C Corp is relatively straightforward and common when businesses prepare to raise venture capital. However, converting from a C Corp to an LLC can trigger significant tax consequences and is generally more complicated.

Many entrepreneurs start with an LLC for simplicity and convert to a C Corp later when seeking institutional investment. This path can work well, but it's still best to choose carefully from the beginning based on your long-term vision.

Additional Considerations​

Tax Planning Opportunities​

Both structures offer unique tax planning opportunities. C Corps can deduct employee benefits like health insurance premiums and retirement contributions. LLCs offer pass-through taxation and the Qualified Business Income deduction. Consult with a tax professional to understand which structure provides better tax advantages for your specific situation.

State-Specific Factors​

Some states impose franchise taxes or annual fees on corporations that can be substantial. Other states have more favorable LLC regulations. Research the requirements in your state before making a decision.

Future Flexibility​

Consider where you want your business to be in five or ten years. While you can convert between structures, it's easier and less expensive to choose the right structure from the start rather than converting later.

Conclusion​

Both C Corporations and LLCs offer valuable liability protection and can serve as excellent foundations for growing businesses. The right choice depends on your fundraising needs, growth trajectory, tax situation, and preference for operational flexibility versus formal structure.

If you're building a high-growth startup that will need venture capital investment, a C Corp is likely your best choice despite the double taxation. If you're running a profitable small business or professional service firm where you plan to distribute most earnings to owners, an LLC probably makes more sense.

Take time to carefully evaluate your options, consult with legal and tax advisors, and choose the structure that best positions your business for success. The decision you make today will influence your company's path for years to come.

Choosing the right business entity is one of the most critical decisions a founder makes. It impacts your taxes, your ability to raise money, and your administrative workload. Two of the most common structures for incorporated businesses are the C corporation and the S corporation. What’s the difference, and which one is right for you?

TL;DR​

C corporations are taxed at the corporate level, and shareholders are taxed again when they receive dividends—a system known as double taxation. S corporations are "pass-through" entities, meaning profits are taxed just once on the owners’ personal tax returns, but they come with strict ownership limits. If you plan to reinvest heavily and raise venture capital, the C corp is often the cleaner, more scalable choice. If you're a profitable, owner-operated business and want to distribute cash while paying yourself a reasonable salary, an S corp can significantly lower your tax bill.

Either way, Beancount.io is built to keep your books clean with plain-text, auditable entries and export-ready financials that make tax time a breeze.

Quick Comparison​

Note: The federal corporate income tax is a flat 21%. However, state rules for both C corps and S corps vary widely. Always verify the tax treatment in your state of incorporation and operation.

What is a C Corporation?​

A C corporation is the standard, default corporate structure in the United States. When you file articles of incorporation with a state, you create a C corp unless you elect otherwise. This structure provides limited liability protection for its owners (shareholders), requires formal governance (a board of directors, officers, bylaws), and creates a legal entity that investors and banks recognize and understand.

How C Corps Are Taxed​

C corps have a distinct tax identity. They file their own corporate tax return, IRS Form 1120, and pay taxes on their net income at the corporate level. If the corporation then distributes its after-tax profits to shareholders in the form of dividends, those shareholders must report that dividend income on their personal tax returns and pay taxes on it again. This is the "double taxation" C corps are known for.

Why Choose a C Corp?​

• Fundraising & Equity: This is the biggest draw for startups. C corps can issue multiple classes of stock (e.g., common and preferred), which is essential for venture capital deals. Structuring option pools, SAFEs, and convertible notes is straightforward.
• Reinvestment: If you plan to plow all your profits back into growing the business, you can avoid the second layer of tax by simply not paying dividends. The profits are taxed once at the corporate rate and remain in the company.
• Signaling: For better or worse, incorporating as a Delaware C corp signals to investors that you intend to build a venture-scale company.

Drawbacks of a C Corp​

• Double Taxation: The primary disadvantage. If you plan to distribute profits regularly, you’ll pay tax twice on the same dollar.
• Administrative Burden: C corps come with more compliance requirements, including holding board meetings, maintaining corporate minutes, and handling more complex state and federal filings.
• Limited Deductions: Certain tax credits and deductions available to individuals or pass-through entities are not available at the corporate level.

What is an S Corporation?​

An S corporation is not a different type of legal entity but rather a special tax election made with the IRS. A domestic corporation (or an LLC that elects to be taxed as a corporation) can file to become an S corp, which allows it to be treated as a pass-through entity for federal tax purposes.

Eligibility Snapshot​

To qualify for and maintain S corp status, a company must meet strict criteria:

• Have no more than 100 shareholders.
• All shareholders must be U.S. individuals, certain trusts, or estates. No corporations, partnerships, or non-resident aliens can be shareholders.
• Have only one class of stock economically. (Differences in voting rights are allowed, but all shares must have the same rights to profits and assets).
• Not be an ineligible corporation, such as a bank or insurance company.
• You must file Form 2553 on time. For an existing business, this is generally by the 15th day of the third month of the tax year (March 15th for a calendar-year business).

Why Choose an S Corp?​

• Single Layer of Tax: Profits and losses "pass through" the business directly to the owners' personal tax returns, reported via a Schedule K-1. The corporation itself does not pay federal income tax.
• Self-Employment Tax Savings: This is a key benefit. Owner-employees must pay themselves a "reasonable salary," which is subject to FICA taxes (Social Security and Medicare). However, any additional profits can be paid out as distributions, which are not subject to self-employment taxes.

Drawbacks of an S Corp​

• Strict Rules: The ownership restrictions are rigid. Accidentally violating one (e.g., selling stock to an ineligible shareholder) can lead to an "inadvertent termination" of S corp status, which can have messy tax consequences.
• "Reasonable Compensation" Scrutiny: The IRS pays close attention to whether the salary paid to owner-employees is reasonable. Paying yourself an artificially low salary to maximize tax-free distributions is a major red flag for an audit.
• State Variability: Not all states recognize the S corp election. Some tax S corps as if they were C corps, or they may impose a separate entity-level tax, partially negating the federal tax benefit.

Which Should You Pick?​

The decision boils down to your goals for ownership, funding, and cash flow.

Consider a C corp if you expect to:

• Seek institutional investment from venture capitalists.
• Create different classes of stock for founders and investors (e.g., preferred shares).
• Use complex equity instruments like SAFEs or convertible notes.
• Have non-U.S. owners, either now or in the near future.
• Reinvest profits for several years before taking significant cash out of the business.

Consider an S corp if you:

• Are 100% owned by U.S. individuals who meet the criteria.
• Are already profitable and want to distribute cash to owners efficiently.
• Can confidently run payroll and pay owner-operators a defensible, market-rate salary.
• Do not need complex equity classes for different types of owners.

If you’re unsure, many businesses start as a Delaware C corp to maintain maximum flexibility. You can evaluate making an S corp election later if your profitability and ownership structure make it advantageous.

Beancount.io: How Your Books Differ (with Examples)​

Whether you choose a C or S corp, Beancount.io’s plain-text ledger makes the flow of money for taxes and equity explicit and auditable. Here are a few examples illustrating the key differences in your journal entries.

1) C Corp: Accruing and Paying Corporate Income Tax​

A C corp is responsible for its own income tax. You'll accrue this liability and then pay it.

2025-03-31 * "Accrue federal corporate income tax for Q1"
  Expenses:Taxes:Income            12500.00 USD
  Liabilities:Taxes:Federal       -12500.00 USD

2025-04-15 * "Pay Q1 2025 federal estimated tax"
  Liabilities:Taxes:Federal        12500.00 USD
  Assets:Bank:Checking            -12500.00 USD

2) C Corp: Paying a Dividend vs. Retaining Earnings​

When a C corp distributes profits, it's a dividend. This is a reduction of equity, not an expense.

2025-06-30 * "Board declares and pays cash dividend"
  Equity:Dividends                 50000.00 USD
  Assets:Bank:Checking            -50000.00 USD

If you retain the earnings instead, you simply don’t post this transaction. The profit stays in your Equity:RetainedEarnings account.

3) S Corp: Reasonable Salary & Payroll Taxes​

S corp owners must be paid a salary. This is a standard payroll expense, complete with employer-side taxes.

2025-01-31 * "Owner payroll (gross wages and employer taxes)"
  Expenses:Payroll:Wages            8000.00 USD  ; Gross salary
  Expenses:Payroll:EmployerFICA      612.00 USD  ; Employer portion of taxes
  Liabilities:Payroll:Federal       -2000.00 USD  ; Withholding + FICA
  Liabilities:Payroll:State           -400.00 USD  ; State withholding
  Assets:Bank:Checking              -6212.00 USD  ; Net pay to owner

2025-02-15 * "Remit payroll taxes to agencies"
  Liabilities:Payroll:Federal        2000.00 USD
  Liabilities:Payroll:State           400.00 USD
  Assets:Bank:Checking              -2400.00 USD

4) S Corp: Owner Distribution​

This is how profits beyond salary are paid out in an S corp. Notice it is not an expense. It's a direct draw from equity, similar to a dividend, but with different tax implications for the owner.

2025-03-15 * "Owner distribution (profit pass-through)"
  Equity:Distributions:OwnerA       20000.00 USD
  Assets:Bank:Checking             -20000.00 USD

The owner receives a Schedule K-1 detailing their share of the company's profit and handles the tax on their personal return.

Chart-of-Accounts Tips​

• Taxes:
  • C corp: You'll need Expenses:Taxes:Income and Liabilities:Taxes:Federal.
  • S corp: This income tax account is often unused at the federal level, but accounts for payroll taxes (Expenses:Payroll:Taxes and Liabilities:Payroll:*) are essential.
• Equity:
  • C corp: A standard setup includes Equity:CommonStock, Equity:AdditionalPaidInCapital, Equity:RetainedEarnings, and Equity:Dividends.
  • S corp: Your chart will look similar but often uses Equity:Distributions instead of dividends. Some track Equity:AAA (Accumulated Adjustments Account) to manage distribution basis.
• Payroll:
  • Both structures will need robust Expenses:Payroll:* and Liabilities:Payroll:* accounts if they have employees (including owner-employees).

Required IRS Forms (Common Cases)​

• C corp: Form 1120 (Annual Income Tax Return), Form 1120-W (Estimated Tax), Form 941 (Quarterly Payroll), Form 940 (Annual Unemployment/FUTA), Form 1099-DIV (for each shareholder receiving dividends), W-2/W-3.
• S corp: Form 1120-S (Annual Income Tax Return), Schedule K-1 (for each shareholder), Form 941/940, W-2/W-3.
• States: Remember that separate state income, franchise, and payroll tax returns will likely apply to both.

FAQ Quick Hits​

• Can an LLC be an S corp? Yes. An LLC can file Form 8832 to elect to be taxed as a corporation, and then file Form 2553 to elect S corp status (assuming it meets all eligibility rules).

• Is an S corp “always cheaper” for taxes? Not necessarily. The benefit depends entirely on your profit levels, the owner's reasonable salary, state tax laws, and the individual owner's tax bracket.

• Can S corps have preferred stock? No, not in an economic sense. S corps can only have one class of stock. You can have different voting rights (e.g., voting and non-voting common stock), but all shares must have identical rights to distributions and liquidation assets.

• Can I switch from one to the other later? Yes, but it can be complex. Converting from a C corp to an S corp is common, but you must be mindful of timing and potential built-in gains (BIG) tax rules. Converting from an S corp to a C corp is also possible and often required before a VC funding round.

How Beancount.io Helps​

No matter which entity you choose, Beancount.io provides the clarity and control you need.

• Plain-text, version-controlled books that scale from a single-owner S corp to a venture-backed C corp.
• Clear payroll and equity workflows that make it easy to distinguish distributions from dividends, track stock option expenses, and manage retained earnings.
• Clean exports for your CPA, including a trial balance, income statement, and balance sheet, with a fully auditable trail for every number.
• Powerful automations for bank feeds and document capture, without ever sacrificing the transparency of a human-readable ledger.

Want a head start? Ask for our sample C-corp and S-corp Beancount charts of accounts and example journal bundle.

*Disclaimer: This guide is for informational purposes only and does not constitute legal or tax advice. Tax laws and entity regulations vary by state and are subject to change. You should consult with a qualified CPA or attorney before choosing or changing your business entity type.*