C - Corporation
The label, "C-Corporation" merely refers to a regular, state-formed corporation. To be formed, an Incorporator must file Articles of Incorporation and pay the requisite state fees and prepaid taxes with the appropriate state agency (usually, the Secretary of State).
Separate Legal and Tax Life
A corporation that is properly formed and operated as a corporation assumes a separate legal and tax life distinct from its shareholders. A corporation pays taxes at its own corporate income tax rates and files its own corporate tax forms each year (IRS Form 1120).
Management and Control in Corporation
Normally, a corporation's management and control are vested in the board of directors who are elected by the shareholders of the corporation. Directors generally make policy and major decisions regarding the corporation but do not individually represent the corporation in dealing with third persons. Rather, dealings with third persons are conducted through officers and employees of the corporation to whom authority is delegated by the directors of the corporation.
Shareholders are the owners of a corporation
Board of Directors
The Board of Directors is responsible for the Management and policy decisions of the corporation. There are, however, a few instances when the shareholders are required to approve of the Actions of the Board of Directors (e.g. amendment to the Articles of incorporation, sale of substantially all of the corporate assets, the merger or dissolution of the corporation, etc...).
Corporate officers are elected by the Board of Directors and are responsible for conducting the day-to-day operational activities of the corporation. Corporate officers usually consist of the following: (President, Vice-President, Secretary, Treasurer).
Number of Persons Required
In most states, one or more persons may form and operate a corporation. Some states, however, require that the number of persons required to manage a corporation be at least equal to the number of owners. For example, if there are two shareholders, there must also be a minimum of two directors.
Corporations may often offer their employees unique fringe benefits. For example, owner-employees may often deduct health insurance premiums paid by the corporation from corporate income. In addition, Corporate-defined benefit plans often afford better retirement options and benefits than those offered by non-corporate plans
To retain the corporate existence and thus the benefits of limited liability and special tax treatment, those who run the corporation must observe corporate formalities. Thus, even a one-person corporation must wear different hats depending on the occasion. For example, one person may be responsible for being the sole shareholder, Director, and Officer of the corporation; however, depending on the action taken, that person must observe certain formalities: Annual meetings must be held, corporate minutes of the meetings must be taken, Officers must be appointed, and shares must be issued to shareholders. Most importantly, however, the corporation should issue stock to its shareholders and keep adequate capitalization on hand to cover any "foreseeable" business debts.
Shareholder Liability for Corporate Debts
Where corporate formalities are not observed, shareholders may be held personally liable for corporate debts. thus, if a thinly capitalized corporation is created, funds are commingled with employees and officers, stock is never issued, meetings are never held, or other corporate formalities required by your state of incorporation are not followed, a court or the IRS may "pierce the corporate veil" and hold the shareholders personally liable for corporate debts.
Avoiding Double Taxation
Generally, the corporation is taxed for its own profits; then, any profits paid out in the form of dividends are taxed again to the recipient as dividend income and the individual shareholder's tax rate. However, most small corporations rarely pay dividends. Rather, owner-employees are paid salaries and fringe benefits that are deductible to the corporation. The result is that only the employee-owners end up paying any income taxes on this business income and double taxation rarely occurs.
S - Corporation
What is an S-Corporation?
An S Corporation begins its existence as a general, for-profit corporation upon filing the Articles of Incorporation at the state level. A general for-profit corporation (also known as a 'C corporation') is required to pay income tax on taxable income generated by the corporation.
However, after the corporation has been formed, it may elect "S Corporation Status" by submitting IRS form 2553 to the Internal Revenue Service (in some cases a state filing is required as well). Once this filing is complete, the corporation is taxed like a partnership or sole proprietorship rather than as a separate entity. Thus, the income is "passed-through" to the shareholders for purposes of computing tax liability. Therefore, a shareholder's individual tax returns will report the income or loss generated by an S corporation.
Qualifying for S Corporation Status
To qualify as an S corporation, a corporation must timely file IRS Form 2553 with the IRS. This election must be made by March 15 if the corporation is a Calendar year taxpayer in order for the election to take effect for the current tax year. However, a "New" corporation may make the filing at anytime during its tax year so long as the filing is made no later than 75 days after the corporation has began conducting business as a corporation, acquired assets, or has issued stock to shareholders (whichever is earlier).
To qualify for S corporation status, the corporation must be a U.S. corporation with only one class of stock. In addition, the corporation cannot have more than 75 shareholders. Further, shareholders must be individuals, estates or certain qualified trusts, who consent in writing to the S corporation election. No shareholder can be non-resident alien
An S-Corporation follows the same state formalities as does a C-corporation (i.e. filing Articles of Incorporation and paying state fees). However, an S-Corporation must make a special tax election under sub-chapter S of the Internal Revenue Code by filing
IRS Form 2553.
The S-Corporation must complete and file IRS Form 1120s to report its annual income to the IRS each year.
General Shareholder Requirements
ALL shareholders of the corporation must be U.S. Citizens or have U.S. Residency Status. If, for any reason, shares are somehow sold or transferred (even if by will, divorce, or other means) to a shareholder who is a foreign national, the corporation will lose its S-Corporation status and be treated as a C-Corporation. In addition, the corporation may never have more than 75 Shareholders.
Only One Class of Stock
S-Corporations may have only one class of stock. Losing S-Corporation Status An S-Corporation that loses its status as such may not re-elect S-Corporation status for a minimum of five years.
Who Should Elect S-Corporation Status
Owners who want the limited liability of a corporation and the "pass-through" tax treatment of a partnership will often make the S-Corporation election.
S- Corporation Election
Another alternative is to elect the S-Corporation Status as discussed earlier. Please consult an accountant or C.P.A. who knows and understands the intimate details of your business along with federal and local tax rules so that you can make the best decision regarding which form of business entity (S-Corporation or C-Corporation) will best suit your needs.
Duration of a Corporation
As a separate legal entity, a corporation is capable of continuing indefinitely. Its existence is not affected by the death or incapacity of its shareholders, officers, or directors or by transfer of its shares from one person to another.
Constitutional Protections for Corporations
Although a corporation is not a "citizen" under the privileges and immunities clause of the Fourteenth Amendment to the U.S. Constitution, a corporation may exercise some of the constitutional protections granted to natural persons:
Right to Due Process and Equal Protection
Corporations enjoy the right to equal protection and due process of law under the Fourteenth and Fifth Amendments to the U.S. Constitution and under similar provisions of the California Constitution.
Freedom of Speech
Absent some narrowly drawn restrictions serving compelling state interests, corporations have the right to express themselves on matters of public importance whether or not those issues "materially affect" corporate business.
Right to Counsel
While a corporation cannot be imprisoned, a criminal action can result in fines and other penalties that could harm shareholders, officers, and other persons. Thus, a corporate criminal defendant has a Sixth Amendment to a Right to Counsel. But note, because a corporation faces no risk of incarceration, it has no right to appointed counsel if it cannot afford to retain private counsel
No Privilege Against Self-incrimination
Corporations have no privilege against self-incrimination (e.g. to prevent disclosure of incriminating corporate records).