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What restrictions do S corporations have?

As you get ready to start your business, you're trying to decide if you want to form a C corporation (C-corp) or an S corporation (S-corp). You know they come with some fundamental differences, including more restrictions on S-corps. But what are those restrictions and will they impact your company?

First of all, you can have a maximum of 100 shareholders with an S-corp. A C-corp, on the other hand, can have an unlimited amount.

So, it all depends on the goals you have for your company. If you plan to use equity crowdfunding or if you eventually want to open it up to public trading, you want to be a C-corp. Then you can get the maximum amount of people to buy in. If you're not planning that type of expansion, the S-corp may be fine. It all depends what you hope the future holds. Consider that future, along with the amount of owners and shareholders you have at launch.

Another restriction for S-corps is that they have to be domestic companies. The business itself has to be inside the United States, and all owners must live within the country. That does not mean they all have to live in Texas, but this can't be an international corporation.

Finally, you cannot have common shares and preferred shares -- or any other type -- when dividing up stock for an S-corp. You are only allowed to use one class of stock, so everyone who buys in has an equal opportunity.

It is very important to consider all of the legal differences between these business types before you open your doors.

Source: TaxAct, "S-Corp vs. C-Corp: What’s Best for Your Business in 2018?," Jean Chatzky, accessed June 08, 2018

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