When beginning a corporate venture, owners ought to keep in mind their
long-term goals for the business. Is the idea to take on more shareholders?
To go public? To offer different classes of stocks? If these are questions
you are asking, you’ll need to know the difference between C and
In both cases, they are separate legal entities created by filing documents
with the appropriate governing body—these are often called “Articles
of Incorporation,” or a Certificate of Incorporation in some cases.
Owners are shareholders, sharing both profits and losses together, but
both structures offer limited liability. This means that the debts, profits,
and losses of the corporation are not the personal responsibility of any
How S and C Corporations Differ
Single-Taxation vs. Double-Taxation
C corporations are standard corporations, which means that they pay taxes
at the corporate level. The business’ profits are reported as taxable
income at the year’s end, and the income of the corporation is taxed.
Then, any profits that are distributed to the shareholders as dividends
are taxed a second time as income for each owner. As a result, the profit
of a C corporation is taxed twice: at corporate level and at shareholder level.
S corporations, however, are only taxed at the shareholder level. At the
S corporation’s year-end, all profits or losses are “passed-through”
to the owners. The owners then report any profits or losses on individual
tax returns. Essentially, the taxes owed by the corporation are divided
proportionally among all owners. In this sense, while there is not double-taxation,
shareholders are more liable for the taxes owed by the corporation.
S corporations are subject to specific limitations on the ownership of
the company. All S corporations must have 100 shareholders or less, and
they must all be US citizens and current residents. In addition, S corporations
cannot be owned by other entities, including C corporations, other S corporations,
partnerships, LLCs, or the majority of trusts.
S corporations can only offer one type of stock—in contrast, C corporation
stocks come in multiple classes, allowing for a wider and varied group
of owners. Selling means that future owners must also abide these constrictions.
Many growing businesses opt to file as a subchapter S corporation due to
the fewer tax burdens on their profits. However, if you are planning on
growing, selling, or bringing on a large number of shareholders and investors
into your business, S corporation ownership limits may constrict your
ability to do so.
Each type of corporate filing has its advantages, but for more specialized
advice regarding your corporation,contact our Chicago
business attorney. We offer
no-cost initial consultations for your business legal needs, and our firm’s 21st-century approach ensures our clients are benefiting from the cutting edge
of business litigation and insight.
For more legal answers, call our Chicago business lawyer at 312-313-0234.