A traditional corporation, known as a C-corporation, is taxed as a separate entity, leading to double taxation of corporate income and dividends to shareholders. An S-corporation, on the other hand, is a corporation that elects to be treated as a pass-through entity (such as a sole proprietorship or partnership) for tax purposes. Since all corporate income is "passed through" directly to the shareholders who include the income on their individual tax returns, S-corporations are not subject to double taxation. Moreover, the accounting for an S-corporation is generally easier than for a C-corporation. There are, however, certain restrictions placed on S-corporations:
- The S-corporation must not have more than 100 stockholders, and each of them must consent. (A married couple is treated as one stockholder).
- Each stockholder must be an individual who is a citizen or resident of the United States, or an estate or qualifying trust of such person.
- The corporation must have only one class of stock. (However, voting differences within a class of stock are permissible). Preferred stock is not allowed.
- The corporation must use the calendar year as its fiscal year unless it can demonstrate to the IRS that another fiscal year satisfies a business purpose.
Corporations wishing to become an S-corporation must file Form 2553 with the IRS, and each stockholder of the corporation must sign the form. LegalZoom will prepare this form for you if you choose.
- Alternative Forms of Incorporation Not every corporation is a C-Corporation or an S-Corporation.
- Checklist for New Corporations
- Choosing Between Corporation and Limited Liability Company LLCs allow a business to have the limited personal liability of a corporation as provided by state law, while being treated as a partnership for purposes of Federal tax laws.
- Conducting Your Business as A Corporation The limited personal liability of a corporation isn't iron clad.
- Corporations compared to LLCs
- Corporations Compared to Sole Proprietorships and Partnerships
- Forming A Corporation: The Basics This article outlines what steps you'll need to take to form a corporation.
- Forming a Corporation
- Operating a Corporation
- The Pros & Cons of S-Corporation Status If the number of shareholders in your corporation is small, you may think that becoming an S-Corporation is the right move, but you should weigh the advantages and disadvantages first.
- S Corporations
- S-Corporation or C-Corporation - Which Should You Choose? Each has different advantages and requirements. Find out more.
- What is a corporation?
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