There are two different types of corporations. The first is (called) a C corporation, (and) the second is an S corporation. The one that you choose will depend on the goals that you have for your business. The main difference between the two is that an S corporation has applied for a special tax status. While this is not the only difference between C corporations and S corporations, they also have several similarities. Understanding these differences and similarities will help you better select the best choice for your business.

Similarities between C corporations and S corporations include:

• Both give shareholders limited liability protection for shareholders. This allows them to separate themselves from the business and not be responsible for (the business's) debts and other liabilities incurred by their business.
• Both C corporations and S corporations are independent legal entities, which are formed by filing the required paperwork with the State.
• Both use the same formation documents - the Articles of Incorporation - when filing.
• Both have shareholders, board of directors, and officers. Shareholders are at the top of this 'food chain' and own the company. They also have the primary responsibility of appointing directors to oversee the major affairs of the corporation. The directors then appoint officers who take care of the day-to-day operations. In the US, all three positions can be held by one person.
• Both C corporations and S corporations must implement uniform external and internal formalities. These include instituting bylaws, issuing stock, calling the first meeting of shareholders and directors, continuously calling for annual meetings and recording the minutes of (what is discussed during) these meetings. They must also compose annual reports and pay annual fees.

Differences between C corporations and S corporations include:

Taxation

• A C corporation is completely separated from its owners and shareholders. Since C corporations are taxed on their profits, before their shareholders receive any money and since the shareholders must also pay their own personal taxes, those within a C corporation may be double-taxed on the same money. This is only a problem when shareholders receive payments in the form of dividends.
• An S corporation is not completely separated from its owners and shareholders. An S corporation is not required to pay Federal taxes, so all of its profit goes directly it its shareholders. The shareholders are then taxed on a personal level. This eliminates the double-taxation scenario seen with a C corporation.

Let's take a look at an example using real dollars and cents:

Corporate Ownership & Structure

• An S corporation may have no more than 100 shareholders, while a C corporation is not limited to the number of shareholders it may have.
• An S corporation's shareholders must all be legal residents of the US, but a C corporation does not have to abide by this same rule.
• A C corporation can be owned by any person or business, such as a partnership, LLC, S corporation, or even another C corporation. An S corporation may not be owned by a partnership, LLC, a C corporation, or another S corporation.
• A C corporation can have different stock classes. An S corporation may only have one in order to disregard voting rights of shareholders.

For more information on forming a corporation or LLC for your business or for complete details on other helpful business and personal legal services, please do not hesitate to email us at info@adanaslaw.com, call us toll-free at 877-420-4600, or contact us online. Be sure to request your FREE Informative Newsletter and Business Start Up Check List!