When starting a new business or restructuring an existing one, you may choose to set up a corporation. The two most common options are the Subchapter S corporation and the C corporation.
These two varieties of corporations are actually quite similar in many ways — they are structured similarly, they both offer limited liability protection to their shareholders and they both require the filing of documentation and the following of standard formal obligations regarding bylaws, holding regular meetings, issuing stock and filing annual reports regarding finances and other matters. But Subchapter S and C corporations also differ in several key ways. The following are the major differences between the two:
Whether to form a Subchapter S or a C corporation may depend on the size of your business. A Subchapter S corporation is typically an ideal structure for smaller businesses with shareholders that are U.S. citizens and fewer than 100 in number. A C corporation, on the other hand, is often a larger business with more than 100 shareholders. These shareholders may include institutions that have invested in the business.
Taxation is a key difference between S and C corporations. Subchapter S corporations don’t pay corporate income tax. Rather, any profits or losses pass through the business and are accounted for on the personal tax returns of the owners. C corporations, on the other hand, file corporate tax returns and run the risk of being taxed two times over if dividends are paid to their owners, as the owners must also pay personal taxes on dividends. Both types of corporation require the payment of personal income tax on employees’ salaries and any dividends the corporation receives.
S and C corporations have different ownership restrictions. The restrictions on C corps are simple: there are none. This makes them very flexible from an ownership standpoint. Meanwhile, Subchapter S corporations are bound to a maximum of 100 shareholders — limiting opportunities for growth without having to restructure — and cannot be owned by anyone other than the shareholders themselves. This means that another Subchapter S corporation, a C corporation, an LLC or a partnership cannot own a Subchapter S corp. There are also stock restrictions on Subchapter S corporations, whereas C corporations are allowed to have multiple classes of stock.
For business owners and executives looking to start a new corporation or make changes to the structure of an existing business, understanding the differences between S and C corporations will be critical in how they move forward. The best approach to incorporating your business involves discussing the different options with an experienced business law attorney.
BoltNagi is a widely respected business and corporate law firm serving clients throughout the U.S. Virgin Islands.