S and C corporations refer to businesses that incorporate in order to guarantee limited personal liability.  The S and C letters stand for the tax status: an S corporation is taxed like a partnership, while a C corporation is taxed like it is its own person, separate from the people who own it. 

We have already talked about what limited liability is.  So what other benefits are there to S and C corporations?  It depends on whether it is an S or a C corporation.

The benefits of a C corporation are that it can be publicly traded.  If your company is going to grow huge, and expand internationally, you will probably want it to be publicly traded.  Publicly traded companies can acquire large amounts of capital as people buy shares in the company.  Further, anyone can be a shareholder, so people in other countries can even buy stock in the company.  However, C corporations have “double taxation.”  That means, when a C corporation makes a profit, it is taxed, because a C corporation is a separate person from its owners under U.S. law.  Then, when the C corporation pays some of the profit to the owner, the owner is taxed individually on his income.  Thus, there can be more tax for owners of a C corporation than owners of a partnership.  Finally, C corporations must observe many formalities in order to keep their limited liability for owners, such as regular meetings of the board of directors and officers, entering business items into meeting minutes, and formal voting.  This can be cumbersome and time consuming.

An S corporation is sometimes known as a “closely held corporation.”  These companies do not usually have publicly traded stock, but function more like partnerships.  They are also taxed like partnerships, so there is no double taxation.  S corporations do not have to maintain the formalities of C corporations, which means they do not have to have the same board meetings and keep minutes.  Stock is transferrable and the owners can personally sell it, however, it cannot be publicly traded.  Also, the big drawback of an S corporation is that nonresident aliens cannot be shareholders!!

Is a C or S corporation right for David?  Probably neither.  At this stage in his business, where he is only in the planning stage, he is probably not going to be profitable enough to be publicly traded, so he will not want a C corporation.  With a C corporation, he also has to keep business formalities, which will waste his time.  He’ll want to avoid the double taxation, too, in order to maximize his profits.  So a C corporation is not right for him

David cannot be an owner in an S corporation because he is a nonresident alien.  Thus, David will have to form another kind of business.

For other information about Business Entities, please click on one of the following topics below:
Starting Your Own Limited Liability Business
LP & LLP
S or C Corporation
LLC and LC
An overview of registering business in different states
Our Services
FAQ