COMMERCIAL LAW Questions and Answers

What is the difference between a subchapter C and S corporation?


The Internal Revenue Code allows for two different levels of corporate tax treatment. Subchapters C and S of the code define the rules for applying corporate taxes.


Subchapter C corporations include most large, publicly-held businesses. These corporations face double taxation on their profits if they pay dividends: C corporations file their own tax returns and pay taxes on profits before paying dividends to shareholders, which are subsequently taxed on the shareholders’ individual returns.


Subchapter S corporations meet certain requirements that allow the business to insulate shareholders from corporate debts but avoid the double taxation imposed by subchapter C. In order to qualify for subchapter S treatment, corporations must meet the following criteria


• Must be domestic


• Must not be affiliated with a larger corporate group


• Must have no more than one hundred shareholders


• Must have only one class of stock


• Must not have any corporate or partnership shareholders


• Must not have any nonresident alien shareholders.


Additionally, after a business is incorporated, all shareholders must agree to subchapter S treatment prior to electing that option with the Internal Revenue Service.