S or C Corporation

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. Other than limited liability, what are the respective benefits of S and C corporations?

The main benefit of a C corporation is that it can be a publicly traded company.  If your company is going to grow to become a huge entity and expand internationally (as well all hope it does), 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 even people in other countries can buy stock in the company.  However, C corporations have “double taxation.”  This means that when a C corporation makes a profit, it is taxed, because a C corporation is considered a separate legal person from its owners under U.S. law.  Then, when a C corporation pays some of the profit to its owners, the owners are taxed individually on their 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.  These formalities 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 of business meetings.  Stock is transferrable and the owners can personally sell it, however, it cannot be publicly traded.  Also, a big drawback of an S corporation is that nonresident aliens cannot be shareholders!!

Is a C or S corporation right for a nonresident alien starting their own business Probably neither. At the early stages of business creation a company probably won’t be profitable enough to be publicly traded, so a C corporation will not be necessary.  With a C corporation, owners also have to maintain business formalities, which will waste time early on.  Aliens will also want to avoid double taxation in order to maximize personal profits.  So a C corporation is not always right for aliens starting their own businesses. Nonresident aliens cannot be owners of an S corporation simply because they are nonresident aliens.  Thus, ambitious yet cautious nonresident aliens will have to form another kind of business.

For more information about Starting Your Business Entities, please click on one of the following topics below: