Corporation Type Comparison
Not all corporations are the same. In this article, we will explain the Corporation Type and Comparison of tax treatments between the normal C corporation with its cousin the S- corporation .We will outline the qualifications and characteristics of each. We will also discuss the differences between the two corporate forms in terms of corporate income tax.
A c-corporation is a company which is treated as its own legal entity. Once incorporated, the owners of such a company enjoy the protection of limited liability from the company’s debts and actions. The downside of the company being its own legal entity is that it must pay its own corporate income tax.
When a C-corporation earns money, it first has to pay income tax on its net income before it can make payments to its shareholders. After that, the shareholders are taxed again on their personal income from the corporation. While this double taxation creates an unfortunate tax situation for investors, the protection offered by the corporate form usually outweighs the tax burden. There is an additional option for tax treatment for a corporation, however, which does not suffer from the same excessive taxes.
A company may qualify for treatment as an S-corporation if it meets the following criteria:
- First, the company must be a normal c corporation or a limited liability company (LLC).
- Second, the company may not have more than one hundred shareholders. These shareholders must be real people – other corporations are not allowed to participate. Moreover, the shareholders must all be United States citizens, or at least live in the United States. Spouses and family members may act together as a single shareholder.
- Finally, these shareholders may only own a single class of (usually common) stock.
For the most part, S-corporations enjoy the same advantages as a regular C-corporation. The major difference between the two has to do with how they are treated with respect to federal taxes.
In contrast, to the double taxation imposed on C-corporations, the S-corporation is not subject to federal income tax. Instead, the profits earned and losses endured by an S-corporation are simply passed along to its shareholders. Each shareholder in an S-corporation is entitled to a share of the company’s profits and losses equal to his percentage ownership in the business. With no federal income tax burden of its own, a successful S-corporation is essentially able to choose how much it wants to pay in income taxes. An S-corporation which experiences a windfall year could, if it chose, spread out payment of those earnings over a number of years, which might allow the company’s shareholders to enjoy lower tax rates.
This article is describes corporation type comparison and the of tax treatments between normal C-corporations and S-Corporations