Corporation Status
An S corporation (a standard business corporation) is one that has elected a special tax status with the IRS. With this tax treatment, it allows the corporation to not be a separate taxable entity. This sounds pretty great, right? Instead of the corporation being taxed separately, the income is treated like a partnership or sole-proprietorship; the income is just “passed through” to the shareholders. So, therefore, the shareholders individual tax returns will report the income or the loss that is generated by an S corporation. Basically, you’re passing off the taxes to your shareholders. Some shareholders may not enjoy this part, but this part I’ll discuss here in a few minutes.
In order to be classified as an S corporation, you must file your Form 2553 with IRS on a timely schedule they have set up.
- 1.Any time before the 16th day of the 3rd month of the tax year that
the election will be
taking place. - 2.At any time during the tax year preceding the tax year it is to take effect. An election made no later than 2 months and 15 days after the beginning of a tax year that is less than 2½ months long is treated as timely made for that tax year.
This may seem a little confusing, but don’t let it be. If the election is held on the 15th day of the 3rd month, generally it will be considered for the next tax year. However, if it’s held on the 15th day of the 3rd month and the corporation can show reasonable cause or reasoning, it will be accepted as a timely filing.
The corporation cannot have any more than 100 shareholders in order to gain S corporation status. All of the shareholders must consent in writing to the corporation becoming S corporation status. None of the shareholders can be non-resident aliens and the S corporation is only allowed to have one class of stock.
Additionally, some states require corporations to complete state-specific S corporation election forms for the state’s taxation purposes. And once again with the exceptions, some states do not even recognize the S corporation status for state taxation. It is best to contact your state of formations taxation department for more information on the legal content regarding S corporations and its requirements.
So let’s compare the S corporation with the C corporation. First, a C corporation is simply a standard business corporation. It is called a C corporation because it is taxed under the subsection C in the IRS code. It is under all regular tax laws.
There are a few similarities between the two corporations. Both corporations must file the same articles of incorporation with the state, whether they are an S or C corporation. Both are considered legal separate entities that are created by filing with the state. Both of the corporations offer the same limited liability, being that the owners are not personally responsible for any debts or obligations that the corporation endures. For both S and C corporations, they are required to uphold the same formalities. They must both hold annual meetings and keep the meeting minutes in the business records.
There are a few things that these two corporations have in common, but there are a few that make them different from one another.
The first is taxation. This is probably the most well-known and the easiest to remember because it is what initially separates the two from each other. The S corporation is what they would call a “pass-through” tax entity; basically, as said above, the income or in a bad case, the loss, would be reflected on the personal income tax of the owners. As for the C corporation, it is still considered a separate taxable entity, but all income or loss is taxed directly to the corporation which can lead to double taxation (as I’ve explained above).
Another difference between the two corporations is the ownership. The S corporation is restricted whereas the C corporation is unlimited; it does not have the same limitations as the S corporation. The IRS has created these restrictions:
- The C corporation can have an unlimited amount of shareholders, while the S corporation is limited to no more than 100 shareholders.
- A C corporation allows non-US residents to be owners, but an S corporation limits the owners to being only US residents.
- S corporations are not allowed to be owned by C corporations, other S corporations, trusts, LLC’s (Limited Liability Corporation), or partnerships. C corporations are not set on these strict guidelines.
A final main difference between the two corporations is the timely election the S corporation must make in order to gain or maintain S corporation status. A C corporation does not require this at all.
