Both a Subchapter C-Corporation and a Subchapter S-Corporation allow a business to operate as a distinct legal entity from its owners and shareholders. Both C-Corporations and S-Corporations provide protection from liability so that the owners are not personally at risk for debts or Judgments against the business. As long as corporate formalities are maintained, the risk of loss owners of C-Corporations and S-Corporations face is limited to the extent of their financial investment in the company.
However, while C-Corporations and S-Corporations share many similarities, there are also some important differences. An experienced Phoenix business law attorney at Lotzar Law Firm, P.C. can help you to understand what structure is best for your business and can assist you with any necessary legal requirements to incorporate and to choose the right business type. Call today to speak with an experienced member of our legal team and learn more.
Subchapter C-Corporations vs. Subchapter S-Corporations
Both C-Corporations and S-Corporations take their names from the chapter of the tax code that applies to each entity. One of the biggest differences between C-Corporations and S-Corporations is the way that they are treated under the tax code.
C-Corporations are taxed on their business income. When profits are distributed to shareholders, these dividends or special payouts are also subject to tax at the personal level as the shareholders must declare the income on their personal returns. This results in the profit earned by the C-Corporation being taxed twice. There are ways to minimize this double taxation, and it is important to have a comprehensive tax plan when forming a C-Corporation.
S-Corporations have special tax status. They are treated as partnerships and business profits and losses are passed on to shareholders directly. This means individual owners of S-Corporations will pay taxes on the income from the business and will be able to deduct any losses on their personal tax returns. While S-Corporations still must file Corporate Tax Returns with the IRS, the business will not pay taxes.
Other differences between C-Corporations and S-Corporations relate to limitations on ownership. S-Corporations can have only a limited number of owners and shares of an S-Corporation generally may not be owned by foreigners, partnerships, or other corporations. C-Corporations, on the other hand, can be owned by individuals who are neither U.S. citizens nor permanent residents. Partnerships and corporations may also have an ownership interest in a business operating as a C-Corporation.
Finally, another important distinction is that C-Corporations can issue different categories of stock while S-Corporations may not and are restricted from using Preferred Stock.
C-Corporations are the default corporate form and companies that wish to operate as S-Corporations must file a special election with the IRS before the filing deadline.
An experienced attorney can assist with the process of incorporating as a C-Corporation or as an S-Corporation. Call Lotzar Law Firm, P.C. today to speak with a member of our legal team and to learn more about how we can help you with business entity formation in Phoenix and throughout Arizona.
- How Often Do I Have to Re-Certify a Tax Credit Tenant’s Household Income? - November 12, 2015
- Property Tax Abatement vs. Property Tax Exemptions – GPLET - November 12, 2015
- Can You Restructure Your Business Under the Arizona Entity Restructuring Act? - November 5, 2015
