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Home / Business / Corporate
Understanding The Difference Between C Corporations And S Corporations
By:David Gass
Based on many financial and technical factors, corporations are categorized into different types. Of these categories, two key types of organizations are 'C Corporations' and 'S Corporations.' A 'C Corporation' or a 'C-Corp' is a corporation that qualifies for the taxes under the Sub chapter C of the Internal Revenue Code of the Internal Revenue Service (IRS). Simply said, a C Corporation is a standard corporation and most of the organizations in the U.S. are incorporated as C Corporations. An 'S Corporation' or 'Subchapter S Corporation' on the other hand, enjoys special tax exemption under the Internal Revenue Code. An S Corporation is exempted from the Federal Corporate Income Tax.
Factors Differentiating C Corporations and S Corporations
Taxation
Taxation is the key difference between the two types of corporations. C Corporations face double taxation. They face one form of taxation at the individual level, and the other at the corporate level. The government taxes the corporation on its profits and the company's shareholders also pay taxes on the company driven earnings such as dividends or any other special payouts. S corporations are exempt from this form of taxation. Instead, profits and losses are passed on to the shareholders according to their stake in the company. The shareholders pay the taxes for an S corporation at the individual level. The shareholders deduct any business losses in their individual tax returns. Also, S corporations can elect to distribute money as profits rather than as salaries to the shareholders. These S corporation profits are exempt from Social Security and Medicare taxes. At the time of selling the corporation as well, the tax on the profits is lower for the S Corporations than for the C Corporations.
Ownership
A non-US citizen or a non-resident alien can own C Corporations, apart from US citizens. Only US citizens or resident aliens can own S Corporations.
Business Entity
Other business organizations may own C Corporations, but they can't own S corporations.
Number of Shareholders or Members
C Corporations can have an unlimited number of shareholders. The number of shareholders in an S Corporation is limited.
Stock types or ownership interest
C Corporations can issue all types of stocks. S corporations can issue only one type of stock and they can't issue preferred stocks
Timely Status Election
The IRS requires S Corporations to file for S Corporation status by the sixteenth of the third month of the tax year in which the election is due. Alternatively the company may file this form at anytime in the tax year preceding the tax year in which the election is to take place. An election completed within two and a half months of the beginning of the tax year is a timely election. An election made after the middle of the third month but before the end of the current tax year will be effective in the next tax year. C Corporations do not require any time frame.
An Additional Thought
Each type of corporation has its own advantages and disadvantages. A well informed and well-thought out decision should be made upon the type of corporation you wish to file the articles for.
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Article keywords: C, S, corporations, double taxation, shareholders, board of directors, taxes, credit, leases, loans
Article Source: http://www.articles2k.com
David Gass is President of Business Credit Services, Inc. His company publishes afree weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com
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