There are two major classifications of corporations: the S corporation and the C corporation.
The C corporation is an unlimited partnership, with few restrictions on who may invest in the company. The s corporation has major limitations placed on it, but its tax status is a great deal less complicated.
Of course, there are more differences than where just mentioned, but this is a basic sketch of the differences. The tax implication is the major reason for choosing one over the other. Both corporations offer liability protection for shareholders, which is a major advantage of incorporation.
I’ll lay out a definition of each.
The C Corporation
This is the full corporation with which most people are familiar.
- Investors of all sorts can buy shares, whether they are foreign or domestic. There are no citizenship requirements. Also, if you choose to sell your shares, there are no restrictions on doing so.
- There is no limit on the number of shareholders in a C corporation.
- C Corporation income is taxed. So the c corp must file its own tax return every year. The members of a c corporation will also file their own taxes, of course.
- Taxes are filed under the Section C part of the Internal Revenue Act. This is why it is called a C corporation.
The S Corporation
- The S corp does not pay corporate income taxes. Members of the s corporation pay taxes on the profits they draw out of the corporation. These are payed according to their share in the corporation.
- The S corporation cannot have more than one hundred members. That is, it cannot have more than this number of shareholders. Employees are a different matter.
- Shareholders in this kind of company must be U.S. citizens or residents. No foreign investors are allowed.
- Only one kind of stock can be offered by the S corporation.
- Taxes are filed under the Section S part of the Internal Revenue Act. This is why it is called an S corporation. As stated before, under these stipulations, the s corporations does not pay a corporate income tax.
Forming an S Corporation
When forming an S Corporation, papers must be filed with a state jurisdiction. This also requires an incorporation fee. These papers must be filed yearly, and the fee must be payed yearly, as well.
Generally, the s corporation should write bylaws for the corporation. Stock certificates must be issued for the s corporation, while all necessary licenses for running the corporation must be obtained. Next, corporate officers or “directors” should be appointed. Meetings for a board of these directors must be held periodically.
Though this sounds complicated, the s corporation is not nearly as complicated as a c corporation. The c corp may draw money from anonymous venture capitalists from all around the world. Average S corporations usually are smaller in size than an average c corporation, though this is not always the case.