C Corporation and S Corporation (Inc. or Ltd.)
There are no restrictions on the ownership of a C corporation.
The shareholders of an S Corporation must be US citizens/residents. S Corporations are restricted to no more than 100 shareholders.
The C Corporation is a complex business structure with more startup costs than many other forms. A corporation is a legal entity separate from its owners, who own shares of stock in the company. Corporations can be created for profit or non-profit purposes and may be subject to increased licensing fees and government regulation than other structures. Profits are taxed both at the corporate level and again when distributed to shareholders.
The IRS classifies Corporations according to how they want to be taxed, there are two types of Corporation:
- C Corporations, named after Subchapter C of the tax code, or
- S Corporations, named after Subchapter S of the tax code
Corporations are more complex than other business structures. Corporations tends to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations and generally suggested for established, larger companies with multiple employees.
Features of a C Corporation
- Incorporated at state level
- Treated as a separate and distinct entity from the shareholders
- Corporations offer the ability to sell ownership shares in the business through stock offerings
- Shareholders are the owners of the Corporation
- Most states allow one individual to hold all offices – director, shareholder and officer, this is called a close corporation
- C Corporations have their own tax identification number and pay their own taxes
- C Corporations have a greater and more complex tax reporting responsibility than most companies
Advantages of a C Corporation
- Limited Liability – When it comes to taking responsibility for business debts and actions of a corporation, shareholders’ personal assets are protected. Shareholders can generally only be held accountable for their investment in stock of the company.
- Ability to Generate Capital – Corporations have an advantage when it comes to raising capital for their business – the ability to raise funds through the sale of stock.
- Corporate Tax Treatment – Corporations file taxes separately from their owners. Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends, while any additional profits are awarded a corporate tax rate, which is usually lower than a personal income tax rate.
- Attractive to Potential Employees – Corporations are generally able to attract and hire high quality and motivated employees because they offer competitive benefits and the potential for partial ownership through stock options.
Disadvantages of a C Corporation
- Time and Money – Corporations are costly and time consuming ventures to start and operate. Incorporating requires start-up, operating, and tax costs that are not required of most other structures.
- Double Taxing – In some cases, corporations are taxed twice – first, when the company makes a profit, and again when dividends are paid to shareholders.
- Additional Paperwork – Because corporations are highly regulated by federal, state, and in some cases local agencies, there are increased paperwork and recordkeeping burdens associated with this entity.
The bylaws of a Corporation are an internal document that contains rules for holding corporate meetings and carrying out other formalities according to state corporate laws. The corporate Bylaws are created solely for the Corporation and it’s shareholders and do not need to be filed with the State.
There are no citizenship or residence requirements for the ownership of a C Corporation.
Shareholders are not personally liable for corporate obligations unless corporate formalities have not been observed; such formalities provide evidence that the corporation is a separate legal entity from its shareholders. Failure to do so may open the shareholders to liability of the corporation’s debts. Corporate formalities include:
- Issuing of stock certificates
- Holding Annual meetings
- Recording the minutes of the meetings
- Electing Directors
Forming a C Corporation
A Corporation is formed under the laws of the state in which it is registered. For corporations, your legal name is the one you register with the state government. State laws vary, but generally corporations must include, at the end of the business name – Corporation, Incorporated or Limited.
How Corporations are Taxed
Corporations are required to pay federal, state, and in some cases, local taxes. Businesses must register with the IRS and state and local revenue agencies, and receive a tax ID number or permit. When you form a corporation, you create a separate tax-paying entity, regular corporations are called ‘C Corporations’ because Subchapter C of Chapter 1 of the Internal Revenue Code is where you find general tax rules affecting corporations and their shareholders.
Unlike sole proprietors and partnerships, corporations pay income tax on their profits. In some cases, corporations are taxed twice – first, when the company makes a profit, and again when dividends are paid to shareholders on their personal tax returns. Shareholders who are also employees pay income tax on their wages.
S Corporation (Inc. or Ltd.)
This structure is identical to the C Corporation in many ways, but offers avoidance of double taxation. If a corporation qualifies for S status with the IRS, it is taxed like a partnership; the corporation is not taxed, but the income flows through to shareholders who report the income on their individual returns. What differentiates the S Corp from the traditional C Corp is the ability to have profits and losses pass through to the shareholder’s personal tax return. Consequently, the business is not taxed itself, only the shareholders who must reside in the USA..