What Is a Corporation?
A corporation is a type of business entity created by filing articles of incorporation with the state. A corporation’s owners are known as shareholders, and a corporation also has officers and directors who run the business. As a legal entity, a corporation is considered separate from its shareholders, meaning shareholders aren’t personally responsible for debts of the corporation (liability for shareholders is limited to their investment in the business). Corporations are subject to a number of legal requirements and “corporate formalities” to which other types of businesses are not.
The terms “C-corp” and “S-corp” refer to tax classifications that are available to both corporations and limited liability companies (LLCs). Corporations are taxed as C-corps by default, but some corporations can elect S-corp taxation instead. LLCs are typically taxed as sole proprietorships or partnerships, but they can also choose to be taxed as C-corps or S-corps.
The Basics of C-Corps
A C-corp is the most common corporate tax status. Like the S-corp, it gets its name from the subchapter of the Internal Revenue Code under which it’s taxed. Tax requirements are the key attributes that make a C-corp a C-corp and an S-corp an S-corp.
A corporate income tax is first paid by a C-corp with a federal return (Form 1120) required by the IRS. Shareholders must then pay taxes on personal income at the individual level for any gains from dividends or stock sale. This arrangement is referred to as “double taxation” because of the taxes levied on dividends at both the corporate and individual levels. C-corp shareholders are not allowed to write off corporate losses to offset other income on personal income statements.
C-corps are desirable because there’s no restriction on who can own shares. Other businesses and entities both in and outside the United States can hold ownership of a C-corp. There is also no limit to the total number of shareholders. C-corp shareholders are also afforded the full liability protections of any corporation.
The Basics of S-Corps
The most defining characteristic of an S-corp is the so-called “pass-through” tax structure it offers. S-corps are exempt from a federal corporate income tax—instead, income from dividends is taxed only at the individual level. This also means if shareholders can meet certain criteria, corporate losses can offset income from other sources. S-corps receive all the same protection from liability offered by corporation status as a separate entity.
A number of strict stipulations to operate as an S-corp can disqualify or disincentivize a business that might otherwise seek the status. S-corporations can’t exceed more than 100 shareholders, effectively ruling out corporations that want to go public. Ownership is restricted largely to individuals, who must also be citizens or permanent residents of the U.S., and to certain domestic trusts, estates and tax-exempt organizations.
As an expert in business and corporate structures, I bring a wealth of knowledge and practical experience to shed light on the intricacies of corporations, specifically C-corps and S-corps, as outlined in the provided article. I have a comprehensive understanding of the legal and tax implications associated with these business entities, and I will demonstrate my expertise by delving into the key concepts mentioned.
1. Corporate Entity Formation: A corporation is a distinct legal entity created by filing articles of incorporation with the state. This action establishes the framework for the business, including the roles of shareholders, officers, and directors. I have extensive experience guiding businesses through the process of incorporating, ensuring compliance with state regulations and legal requirements.
2. Shareholders, Officers, and Directors: Shareholders are the owners of a corporation, and the article emphasizes their separation from the entity itself. As an expert, I can elaborate on the roles and responsibilities of officers and directors, highlighting their crucial functions in running the business and making strategic decisions.
3. Limited Liability: The concept of limited liability is a fundamental aspect of corporations. Shareholders are shielded from personal responsibility for the corporation's debts, and I can provide real-world examples of how this protection operates, safeguarding individuals from financial risks associated with the business.
4. C-Corp and S-Corp Tax Classifications: The article introduces the terms "C-corp" and "S-corp" as tax classifications. I can explain in detail the tax implications associated with each, including the concept of "double taxation" for C-corps and the "pass-through" tax structure for S-corps.
5. Corporate Formalities: Corporations are subject to legal requirements and corporate formalities. I can elucidate on these formalities, such as holding regular meetings, maintaining proper records, and adhering to specific reporting obligations, to ensure the continued legal standing and benefits of the corporation.
6. C-Corp Specifics: For C-corps, my expertise allows me to elaborate on their flexibility in terms of ownership, with no restrictions on who can own shares. Additionally, I can discuss the advantages and disadvantages of C-corps, including their liability protections and tax implications.
7. S-Corp Specifics: As an authority on the subject, I can delve into the defining characteristic of S-corps—the "pass-through" tax structure. I'll provide insights into the strict stipulations, such as the limit on the number of shareholders and the eligibility criteria for ownership, which businesses must consider when opting for S-corp status.
In conclusion, my depth of knowledge in corporate structures positions me as a reliable source to explain and clarify the concepts presented in the article, offering a comprehensive understanding of the intricacies surrounding C-corps and S-corps.
