C Corporation Vs. Subchapter S Corporation
A corporation is a type of legal identity that allows a company to exist as a separate entity from its owners. Ownership of corporations is represented by shares of stock, which allow shareholders to easily buy and sell portions of the company. In the United States, two types of corporations exist: Subchapter C corporations and Subchapter S corporations. These two types of corporations have various advantages and disadvantages.
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Ownership
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The number of people who can own a C-corp is unlimited. It is very frequent to find that C-corps have thousands of owners. The stocks of these companies are frequently bought and sold as commodities in stock markets. These shareholders can be people who are living anywhere in the world, regardless of their nationality or residency status. An S-corp, however, cannot have more than 100 shareholders, and these shareholders must be citizens or resident aliens. Non-residents cannot own stock in S-corps.
Taxation
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S-corps and C-corps are taxed in different ways. One of the disadvantages of a C-corp is that it faces double taxation: the company itself must pay corporate income taxes, and the dividend distributions that it makes to shareholders are taxable as individual income as well. S-corps, on the other hand, do not face double taxation. When an S-corp makes a profit, the government does not tax this profit on the corporate level. Instead, the S-corp makes dividend payments to shareholders and salary payments to owner-operators, and these payments are taxable as personal income.
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Management
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In both C-corps and S-corps, the shareholders elect directors to run the company, and these directors receive a salary to represent the shareholders in day-to-day decision-making. In S-corps, these shareholders are often composed completely of closely connected individuals who work together to make company decisions, and the election of a director may be a mere formality. In large C-corps, shareholders often do not ever meet the directors of the company. Law requires both S-corps and C-corps to hold annual shareholder meetings.
Liability
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Both C-corps and S-corps give a level of liability protection to shareholders. This means that, if the corporation accrues debts and financial responsibilities that it is unable to pay, creditors cannot hold shareholders financially liable for these company debts in the way that owners of sole proprietorships are personally liable for their business debts. However, if you are an owner-operator of an S-corp, take care: You may still be personally liable for damages incurred on other individuals if you directly supervised the actions that brought about the damages.
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