S Corporation / C Corporation
- An S Corporation is simply a C Corporation (also known as a standard business corporation) that files IRS form 2553 to elect a special tax status with the IRS. The articles of incorporation that are filed with the state are same whether a corporation is a C Corporation or S Corporation.
- They both are separate legal entities that are created by a state filing. Both offers the same limited liability protection; the owners are typically not personally responsible for the debts and liabilities of the business.
- Both entities are required to follow the same formalities. They must hold annual meetings of shareholders and directors each year and meeting minutes must be kept with the corporate records.
- The S Corporation is a pass-through tax entity, this means that the income or loss generated by the business is reflected on the personal income tax return of the owners.
- A C Corporation is a separately taxable entity. The profits and losses are taxed directly to the corporation. This can lead to double taxation on dividends that are paid out of corporate profits to the owners.
- The ownership of an S Corporation is restricted; however, the C Corporation does not possess these same limitations. The following are some of the restrictions imposed by the IRS:
- The C Corporation can have an unlimited number of shareholders while a subchapter S Corporation is restricted to no more than 100 shareholders.
- Non-US residents can be owners of a C Corporation while an S Corporation may not have non-US residents as shareholders.
- Also, S Corporations cannot be owned by C Corporations, other S Corporations, many trusts, LLCs, or partnerships. C corporations are not subject to these restrictions.
- The S Corporation must make a timely election of S Corporation status.The IRS instructions indicate this form must be completed and filed:
- at any time before the 16th day of the 3rd month of the tax year the election is to take effect, or
- at any time during the tax year proceeding the tax year it is to take effect. An election made no later than 2 months and 15 days after the beginning of a tax year that is less than 2 months long is treated as timely made for that tax year.
An election made after the 15th day of the 3rd month but before the end of the tax year generally is effective for the next tax year. However, an election made after the 15th day of the 3rd month will be accepted as timely filed if the corporation can show that the failure to file on time was due to reasonable cause.
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