A C Corporation and an S Corporation are two types of business entities that exist in the United States. While they share many similarities, there are also some significant differences between them.
Formation and Structure:
- C Corporation: A C Corporation is the default form of a corporation. It is formed by filing articles of incorporation with the state where the business will operate. C Corporations have no restrictions on ownership and can have an unlimited number of shareholders. They can issue different classes of stock and can be owned by individuals, other corporations, or partnerships.
- S Corporation: An S Corporation is a special type of corporation that must meet specific eligibility requirements to obtain its status. To become an S Corporation, the business needs to file Form 2553 with the Internal Revenue Service (IRS). An S Corporation has limitations on ownership, which includes being limited to 100 shareholders and having only one class of stock.
Taxation:
- C Corporation: C Corporations are taxed as separate legal entities. They file their tax returns using Form 1120, and the profits generated are subject to corporate income tax. Additionally, if the corporation distributes dividends to its shareholders, those dividends may be subject to double taxation since the recipients also have to pay personal income tax on the dividends received.
- S Corporation: S Corporations are “pass-through” entities for tax purposes. This means that the corporation itself does not pay income taxes. Instead, the profits and losses of the S Corporation are passed through to the individual shareholders, who report them on their personal income tax returns. This avoids the issue of double taxation.
Ownership and Shareholders:
- C Corporation: C Corporations have no restrictions on ownership and can have an unlimited number of shareholders. Shareholders can be individuals, other corporations, or partnerships, and they can reside within or outside the United States.
- S Corporation: S Corporations have restrictions on ownership to maintain their special status. Some of these restrictions include being limited to 100 shareholders, all of whom must be U.S. citizens or residents, and having only one class of stock. This means that an S Corporation cannot have preferred stock or issue different classes of stock.
Formalities and Governance:
- C Corporation: C Corporations are subject to more formalities and governance requirements. They need to hold regular meetings of shareholders and directors, maintain detailed corporate records, and comply with various state regulations. They must also have a board of directors overseeing the company’s operations.
- S Corporation: S Corporations have fewer formalities and governance requirements compared to C Corporations. While they must still hold shareholder and director meetings and maintain appropriate records, the level of formality is generally less stringent.
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