An S corp is another type of corporate structure. It is a variation of a corporation within subchapter S of Chapter 1 of the IRS code. This legal entity passes deductions, losses, income, and credit through shareholders for federal tax purposes, and has relief from double taxation and limited liability. While an S corp provides certain protections that a C corp doesn’t, it also comes with more restrictions.
Formation
In order to form a C corp, you have to first form a corporation. The formation must be in alignment with your state laws. The process entails picking a corporate name, creating articles of incorporation, registering it with the secretary of state, preparing corporate bylaws, selecting directors, and holding the first board of directors meeting.
When you form a C corp, the first thing you have to do is to select a name for your corporation that no one else has in your state. Typically, you can select three names, then the business office will let you know which one they select.
The name of your corporation should end with limited, incorporated, or corporation. You also need to make sure that no other company has that trademark name. Just do a US patent and trademark search to find this information. Then you'll know if another company is using that trademark name.
Next, the directors need to be appointed. If you choose to appoint other offices, this should be done before filing. In order to make your new entity official, you will need to file articles of incorporation with the secretary of state's office. In order to file these papers, you may have to pay a filing fee that ranges from $40 to $450.
Every C corp must have bylaws. These are the guidelines and rules for the operation of your company. The bylaws should also include who can vote and when you will have directors' meetings. Failing to hold these meetings can result in a loss of your C corp status. Thus, these meetings should not be taken lightly. You may be asked by an authority to show the minutes.
You will also need to hold a first directors' meeting. At this meeting, the bylaws will be approved. The minutes of that meeting must be written down and kept on file. Regular meetings are one of the requirements for maintaining ayour C corp status.
A C corp is the basic corporate structure. You can transition from a C corp to an S corp by filing a special form with the IRS. The IRS Form 2553 is used to accomplish this. It must be properly filled out, filed, and signed by all of the shareholders.
Formation costs
Based on market data, the average formation cost for an S corp is about $1,200. And the market data for the average formation cost for a C corp indicates that it is about $633. When you think about it, the cost for both is pretty reasonable, especially considering that you have the opportunity to start your own business. However, it’s clear that S corps incur greater formation costs than C corps.
Taxes
S corps don't actually pay corporate income taxes. The company’s individual shareholders split up the income and report it on their own personal income tax. This way, S corps avoid double taxation. S corps actually avoid the business tax by passing their income onto the business owners directly.
C corps are taxed differently. A C corp pays corporate income tax on its income. Its income is determined after deducting losses, credits, and deductions. The C corp then pays its shareholders dividends. The shareholders have to pay personal income taxes on these dividends. It is often referred to as double taxation and that can be one of the negative aspects of maintaining a C corp.
This is the main difference between S corp and C corp, and is often the factor that helps individuals decide between forming an S corporation vs C corporation.
Membership
Both US residents and US citizens can be shareholders of an S corp. An S corp is permitted to have a maximum of 100 shareholders. Even teenagers who are 18 years of age can become a shareholder in an S corp, but many other entities, like partnerships and trusts, are prohibited from holding stock in an S corp. This is important to know.
You do not have to be a US citizen or a US resident to be a shareholder in a C corp. This makes the membership requirements for a C corp much more flexible than the requirements set forth by an S corp.
Class of stock
Stock is always an important component of a publicly traded business. An S corp is only permitted to have one class of stock. In this respect, it is treated as having one class of stock when all shares of stock have the same rights of liquidation and distribution proceeds.
On the other hand, a C corp is allowed to have two or more classes of common stock. Additionally, the majority of voting rights are retained.
Another significant difference between C corps vs S corps has to do with the origin of the company’s shareholders. S corps must be domestically based and the owners of the company must be U.S. citizens of permanent residents. In contrast, C corps can be based out of anywhere and the owners don’t necessarily have to be U.S. citizens or residents.
