C Corporation v. S
Corporation
Both the C
corporation and the S corporation are formed the same way under
state law and are the same legal entity for corporation law matters.
This means that both types of corporations have the same legal
structure and management structure and are subject to the same state
formalities and requirements.
The difference
between a C corporation and an S corporation is really a federal
income tax difference.
C Corporation
Under the Internal Revenue Code, a C corporation is subject to the
corporation tax structure which is a double taxation structure.
Profits from a C corporation are subject to one level of corporate
tax and then if any profits are distributed to shareholders, those
same profits are subject to a second level of tax.
C corporations do
have unique tax benefits when it comes to employee benefits.
If your corporation intends on offering employees certain benefits
such as pension and 401(k) plans, fringe benefits, and stock
options, you should seek the advice of your accountant to determine
which tax structure is best for your corporation.
S Corporation
An S corporation is taxed under the partnership tax structure
for federal income taxes. Under this structure, the profits of
the S corporation are only taxed once and this is known as
pass-through taxation.
However, not every
corporation can choose to be an S corporation. The corporation
and its shareholder must meet certain requirements. The major ones
are as follows:
-
The
corporation cannot have more than 100 shareholders;
-
All
shareholders generally must be individuals;
-
All
shareholders must be US citizens or permanent residents;
-
The
corporation can only have one class of stock;
If you form a
corporation and want to avoid the double taxation structure of C
corporation, your corporation must file a Form 2553 S corporation
election with the IRS and this should be filed no later than the
15th day of the 3rd month after the corporation has been
incorporated.
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