I am a lawyer. I speak lawyerese very well; but my clients don’t want to hear it sometimes. They want plain English. So here you go:
The difference between a subchapter “c” corporation and a subchapter “s” corporation is purely taxation based. That is, the federal government through the IRS, allows both small and large corporations to “tailor” the way that they are taxed. This in turn helps both the small and large firm better manage its tax situation. By the way, the word “subchapter” references the location in the tax code of the regulations concerning corporations.
A “s” corporation allows the profits and losses that the corporation makes in any year to pass “through” the corporation as though it didn’t exist. The profits and losses land your income tax forms of each shareholder (in proportion to the amount of stock that each owns) as a “K-1” filing; but the profits and losses are taxed at your personal income tax rate.
A “c” corporation has a double tier of taxation. First every dollar in revenue that comes into the coffers of the corporation is first taxed at whatever rate the corporation finds itself. Then, if the corporation issues a dividend to its shareholders that money is again taxed at each shareholder’s personal income tax rate.
There are advantages to both and they will be covered in the next blog.
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