Subchapter C or Subchapter S Corporation: What are the Differences?

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. subchapter C or Subchapter S Corporation

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.

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