What is the difference between an “S” corporation and a “C” corporation?
All corporations start as “C” corporations and are required to pay income tax on taxable income generated by the corporation. A C corporation becomes a S corporation by completing and filing federal form 2553 with the IRS. An S corporation’s net income or loss is “passed-through” to the shareholders and are included in their personal tax returns. Because income is NOT taxed at the corporate level, there is no double taxation as with C corporations. Sub-chapter S corporations, as they are also called, are restricted to having fewer than 100 shareholders, who must be individuals (S Corps cannot be owned by other corps) who are not nonresident aliens.
The Internal Revenue Service (www.irs.gov) gives these designations. An S-Corporation has a limit of up to 75 shareholders (not necessarily shares). They can issue only one class of stock. As a legal entity, the C-Corporation is separate and distinct from the stockholders – the owners of the corporation. Under the Washington Business Corporation Act, there is no distinction between a C-Corporation and an S-Corporation. However, the two types of corporate entities are subject to differing federal and state tax treatment. Your attorney or accountant can determine whether any of these restrictions apply in your situation.
An “S” corporation is a very attractive entity. Available to small companies (up to 75 shareholders, all of whom must be citizens or residents of the U.S.), it provides the benefits of incorporation, while eliminating “double taxation.” Rather than being taxed at the corporate level, profits and losses (pass through in accounting terms ) are included in your personal return (claiming business losses can reduce your personal tax bill, especially in the “start-up” year, and possibly the second and third fiscal year of the company). These extra tax advantages are not available to shareholders in a regular “C” corporation. An “S” corporation though can only issue one class of stock. Incorporate USA can apply for “S” status for your company and does not currently charge for completion of the form.
All corporations start as “C” corporations and are required to pay income tax on taxable income generated by the corporation. A C corporation becomes a S corporation by completing and filing federal form 2553 with the IRS. An S corporation’s net income or loss is “passed-through” to the shareholders and are included in their personal tax returns. Because income is NOT taxed at the corporate level, there is no double taxation as with C corporations. Subchapter S corporations, as they are also called, are restricted to having no more than 100 shareholders.