Q:
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What is C Corporation?
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A:
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The C Corporation is a form of company organization. This form of company needs to be initiated by a certain number of shareholders. C Corporation is the default corporation under Internal Revenue Service (IRS) rules. C corporations limit the liability of investors and firm owners since the most that they can lose in the business's failure is the amount they have invested in it. Generally, the shareholders of a corporation are not personally liable for the debts, obligations and liabilities of the entity.
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What is S Corporation？
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A C Corporation can elect to be taxed as an S Corporation by filing Form 2553 with the IRS. Please note while most states follow the federal S Corporations election, some jurisdictions do not recognize the S Corporations (e.g. New York City) or require separate state elections (e.g. New York State, State of New Jersey).
To obtain S Corporation tax status for a certain year, you should complete the Form 2553 no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year preceding the tax year it is to take effect.
IRS requires S Corporations cannot have more than 100 shareholders; issue more than one class of stock; have shareholders who are not U.S. citizens or residents; be owned by corporations, other S corporations (with some exceptions), LLCs, partnerships or many trusts. While C Corporations do not have above restrictions.
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What are the similarities?
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Here are some of the qualities shared by both C corporations and S corporations:
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Limited liability protection: Corporations offer limited liability protection, so shareholders (owners) are typically not personally responsible for business debts and liabilities. This is true whether it is taxed as a C corporation or an S corporation.
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Separate legal entities: Corporations (C corps and S corps) are separate legal entities created by a state filing.
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Filing documents: Formation documents must be filed with the state. The formation documents and procedures are the same regardless of whether you choose to be taxed as an S corporation or C corporation.
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Compliance Requirements: The state corporation laws make no distinction between C corporations and S corporations when it comes to compliance responsibilities. All corporations are required to follow the internal and external corporate formalities and obligations, such as adopting bylaws, issuing stock, holding shareholder and director meetings, maintaining a registered agent and registered office, filing annual reports, and paying annual fees.
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What are the differences between S Corporations and C Corporations?
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Generally speaking, the biggest difference between S Corporations and C Corporations is taxation.
C Corporations are separately taxable entities. They are subject to double taxation. C Corporations file the Form 1120 and pay the corporate income tax. Then the after-tax income distributed to shareholders as dividends will be taxed again and are reported by the shareholders on their personal tax returns.
On the other hand, taxation is fairly simple for the S Corporations. S Corporations are pass-through taxation entities. They file the information federal return (Form 1120S), but do not pay tax at the corporate level. The profits/losses are passed through the S Corporations to the shareholders and are only taxed to the shareholders on their personal tax returns.
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Do I need to choose C or S Corporations?
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If the shareholders of your corporation are U.S. U.S. citizens or residents and less than 100, business size is small and you do not IPO in the future, S Corporations is a better choice for you. Please note that some jurisdictions do not recognize the S Corporations (e.g. New York City) and you should file tax returns just as C Corporation in those jurisdictions. C Corporation has less restrictions and will result in higher tax rate. Whether you should choose a C Corporation or S Corporation depends on your actual situation.
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