The Differences Between a Subchapter S and a Subchapter C Corporation

Choosing the Right Corporate Form

You’re setting up a new business and you know you want to set up as a corporation. It’s not that simple, though—there are two types of for-profits corporations from which to choose—Subchapter S and Subchapter C corporations. What are the differences and what’s best for you?

First, let’s look at what both of these corporate forms have in common. With an S or a C corporation, you’ll be creating a separate legal entity that can potentially shield you from liability. Provided that you follow all requirements to set up a corporation and that it’s not actually being operated like a sole proprietorship or a partnership, your personal assets will be protected in any legal action against the corporation. With both forms, you’ll issue shares of stock to shareholders, keep corporate records and have regularly scheduled meetings of the board of directors and the shareholders.

One of the principal differences between a C corporation and an S corporation is the way the different entities are taxed. An S corporation is considered a “pass-through” entity, with profits passing through to shareholders. An S corporation does not pay income tax at the corporate level, but the profits that pass through are taxed on the recipient’s personal income tax return. A C corporation, though, does pay a corporate income tax (though the tax rate was just significantly reduced with the Congressional tax bill). In addition, the profits that are passed on to shareholders as dividends are also subject to income tax at the personal level.

Another major difference between an S and a C corporation—the maximum number of shareholders. There’s no limit with a C corporation, but an S corporation cannot have more than 100 shareholders. As a practical matter, that makes it easier for a C corporation to raise new capital, as it can have a public offering and issue new shares.

Another caveat with an S corporation—all shareholders must either be citizens or residents of the United States.

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