Incorporating a business can have a profound impact on business operation and on the rights of the company owners. When you incorporate, you will need to decide if you want the business to become an S Corporation or a C Corporation. While both an S Corp and a C Corp provide similar benefits in terms of liability protection, there are some very important differences.
An experienced San Diego corporate formation lawyer at Sepahi Law Group, APC can help you to determine whether a Subchapter C or Subchapter S corporation is the best choice for your organization. Call today to schedule a consultation and get started on the incorporation process.
Differences Between a Subchapter C or Subchapter S Corporation
There are myriad differences between an S Corp and a C Corp, but the most important differences relate to how corporate profits and losses are taxed and who the owners of the corporation can be. For example:
- S Corporations allow for pass through taxation, which means they are taxed like a partnership. Individual owners of the corporation declare profits and losses on their personal tax returns. While the business must file a tax return, the S Corporation itself pays no taxes. C Corporations, on the other hand, are taxed on profits. When a C Corp distributes profits to owners, the owners are taxed again. This can result in double taxation.
- C Corporations can be owned by non-US citizens while S Corporations may only be owned by citizens or resident aliens.
- Partnerships and other corporations may own shares of C Corporations but are not allowed to own shares of S Corporations.
- C Corporations can be owned by an unlimited number of shareholders. S Corporations are restricted to a limited number of owners.
- S Corporations are not permitted to issue different categories of stock. C Corporations can issue different categories, including preferred stock. This allows different classes of owners to have differing ownership interests in the business.
When you form a corporation, it will automatically be considered a C Corporation unless you file a special form (Form 2553) to elect to be treated as an S Corporation. The S Corp election must be filed in the tax year preceding the year in which you wish to begin operating as an S Corporation or must be filed by the 16th day of the third month in which your S Corp election is due. If you file Form 2553 in the preceding tax year, it has to be completed within 2 1/2 months of the beginning of the tax year.
While S Corps can be a preferred choice for avoiding double taxation, it may be easier to incorporate as a C Corporation if you hope to some day take your business public. This is just one of many things to think about when deciding whether your business should become a Subchapter C or Subchapter S corporation.
A San Diego corporate formation lawyer at Sepahi Law Group can assist you in deciding between incorporating as a Subchapter C or Subchapter S Corporation and can help with all required paperwork including an S Corp election. Call today to schedule a consultation and learn more.