Corporations are of two different kinds:
the C corporation and the S corporation. If you’re thinking
of converting your sole proprietorship or partnership to a
corporation, you’ll need to choose between these two.
Which is better usually depends on the aims and objectives
you have for your business. Which way to go can be a bit tricky
if you’re unaware of the salient features of both.
The similarities between the two are
as follows:
One of the major similarities is the protection
offered under the limited liability offer. Under this
clause, the corporation’s owners are not responsible
personally for paying off debts incurred by the business.
So, the personal assets (car, house etc.) of the owners
are saved from being seized and sold to pay off debts
to creditors.
For both the corporations to be brought into existence,
state filing is required. This makes them legal.
Even if you incorporate your business into S or
C-corporation, the articles of incorporation must
be filed with the state. These are the fundamental
formation documents of businesses.
Both corporations give full authority to the shareholders
or owners regarding the election of a board of directors.
Election of officers is then carried out to manage
the daily affairs of the business. The Board of Directors
generally only gets involved if there’s a genuine
need – such as in the cases of complex challenges
and major decisions.
It’s mandatory for both types of corporations
to strictly observe the formalities set by the state
and other authorities. Issuing stock, compulsory meetings
of shareholders and directors, keeping corporate records
and adopting bylaws, are some of the basic internal
formalities necessary for running an S-corporation
as well as a C-corporation business. Paying annual
fees, submission of annual reports etc, are some of
the external formalities that must be observed by
both the corporations.
Here are some
of the major differences between the corporations:
Corporate ownership. C corporations are allowed
to have an unlimited number of shareholders, but this
is not the case with the S corporations. They can
have at the most 100 shareholders, and they must be
US residents. C corporations also cannot own them.
In addition, other S corporations, LLCs or any other
trust cannot own an existing S corporation. However
, such restrictions aren’t imposed on C corporations.
Also, C corporations are allowed to have multiple
classes of stock, which is not the case with S corporations.
Taxation. S corporations need not pay taxes at
the corporate level, although they need to file tax
returns. Here, the business profits are transferred
to the individual tax returns of the owners and so
the taxes are paid at individual tax rates. This saves
the S corporations from paying double taxation on
the profits incurred. However, the C corporations
need to file a corporate tax return and report any
profits or losses. These corporations therefore face
double taxations as the profits are distributed among
owners as dividends. These dividends have to be reported
at an individual level.
Election. Regular and in time filing of Form 2553
is mandatory for S corporations. It must be submitted
to the IRS.
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