C Corporations and S Corporations

What are the Similarities?

• 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 are both separate legal entities that are created by a state filing. Both offer 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 meeting of shareholders and directors are required each year and meeting minutes must be kept with the corporate records.

What are the Differences?

• Taxation:
o 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.
o 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.
o The C Corporation can have an unlimited number of shareholders while a subchapter S Corporation is restricted to no more than 75 shareholders.
o Non-US residents can be owners of a C Corporation while an S Corporation may not have non-US residents as shareholders.
o 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 election, which is made by filing form IRS 2553, must be made by March 15 in order for the election to take effect for that year. If the election is made after March 15 but within 75 days of the incorporation date, the election will be effective for the next calendar year. If the S Corporation is not a Calendar year taxpayer, the election must be made within 75 days of the beginning of the corporation's tax year.