Question & Answer: Help with writing this paper for my Partnership & Corp Taxation class…..

When starting a business or changing your business structure, one of the most common options small business owners evaluate is whether to form an S corporation (S corp) or C corporation (C corp). These are the two most common ways to incorporate online, and the choice really depends on your business goals. When a corporation is originally chartered by the state, it exists as a C corporation. If you do nothing more after forming your corporation, it will remain a C corp. A C corporation becomes an S corporation only when, with the consent of all shareholders, special tax treatment (“pass-through taxation”) is sought by filing Form 2553 with the IRS in accordance with Subchapter S of the Internal Revenue Code.

The similarities

The C corporation is the standard corporation, while the S corporation has elected a special tax status with the IRS. It gets its name because it is defined in Subchapter S of the Internal Revenue Code. To elect S corporation status when forming a corporation, Form 2553 must be filed with the IRS and all S corporation guidelines met. But C corporations and S corporations share many qualities:

• Limited liability protection. Both offer limited liability protection, so shareholders (owners) are typically not personally responsible for business debts and liabilities.
• Separate entities. Both the S corp and C corp are separate legal entities created by a state filing.
• Filing documents. Formation documents must be filed with the state. These documents, typically called the Articles of Incorporation or Certificate of Incorporation, are the same for both C and S corporations.
• Structure. Both have shareholders, directors and officers. Shareholders are the owners of the company and elect the board of directors, who in turn oversee and direct corporation affairs and decision-making but are not responsible for day-to-day operations. The directors elect the officers to manage daily business affairs.
• Corporate formalities. Both are required to follow the same internal and external corporate formalities and obligations, such as adopting bylaws, issuing stock, holding shareholder and director meetings, filing annual reports, and paying annual fees.

The differences

Despite their many similarities, S corporations and C corporations also have distinct differences.

• Taxation. Taxation is often considered the most significant difference for small business owners when evaluating S corporations vs. C corporations.
  • C corporations. C corps are separately taxable entities. They file a corporate tax return (Form 1120) and pay taxes at the corporate level. They also face the possibility of double taxation if corporate income is distributed to business owners as dividends, which are considered personal income. Tax on corporate income is paid first at the corporate level and again at the individual level on dividends.
  • S corporations. S corps are pass-through tax entities. They file an informational federal return (Form 1120S), but no income tax is paid at the corporate level. The profits/losses of the business are instead “passed-through” the business and reported on the owners’ personal tax returns. Any tax due is paid at the individual level by the owners.
  • Personal Income Taxes. With both types of corporations, personal income tax is due both on any salary drawn from the corporation and from any dividends received from the corporation.
• Corporate ownership. C corporations have no restrictions on ownership, but S corporations do. S corps are restricted to no more than 100 shareholders, and shareholders must be US citizens/residents. S corporations cannot be owned by C corporations, other S corporations, LLCs, partnerships or many trusts. Also, S corporations can have only one class of stock (disregarding voting rights), while C corporations can have multiple classes. C corporations therefore provide a little more flexibility when starting a business if you plan to grow, expand the ownership or sell your corporation.

Broadly picture look like this:

S corporation (S corp) election

An S corporation election can be filed anytime after the corporation is formed – immediately, or years later.

When you make a valid S election with the IRS for federal income tax purposes, most states will also honor that federal S election for state purposes. However, a few states require that you also file an S corporation election with the state, and some states do not extend the same S corporation tax exemptions. You will want to find out exactly how the state in which your corporation will operate treats S corps.

You should also know that an S corporation can convert back to a C corporation by filing a formal request with the IRS, but the C corp must keep the December 31 fiscal year (required for S corps) and it cannot later convert back to an S corp for at least five years.

Identifying the most beneficial tax treatment for your specific situation is very important, paying dividends for years to come. Delaying your S corp election decision will give you time for further consideration as well as an opportunity to consult with your attorney, accountant or tax advisor.

Your corporation can continue as a C corp for as long as you like. Preparation of Form 2553 (which you must file with the IRS) is the only additional step MaxFilings performs when you select “S corp” as part of our online incorporation process, and preparing Form 2553 has no e

To become an S corporation, you must file Form 2553 with the IRS. The IRS instructions—which can be a bit tough to follow—require that an election is considered effective in the current tax year only if the Form 2553 is completed and filed:

• Any time before the 16th day of the 3rd month (for calendar year tax payers, this means it needs to happen by March 15th)
• Any time during the preceding tax year (however, an election made no later than 2 months and 15 days after the beginning of a tax year that is less than 2½ months long is treated as timely for that year).

Generally, an election made after the 15th day of the 3rd month but before the end of the tax year is effective for the next tax year (unless you can show failure to file on time was due to reasonable cause).

It’s the most common type of corporation in the U.S. – and with good reason. C corporations (c corps) offer unlimited growth potential through the sale of stocks, which means you can attract some very wealthy investors. Plus, there is no limit to the number of shareholders a c corp can have.

Advantages of a C Corporation

There are many benefits of a c corp. Below are just a few that stand out.

• Limited liability. This applies to directors, officers, shareholders, and employees.
• Perpetual existence. Even if the owner leaves the company.
• Enhanced credibility. Gain respect among suppliers and lenders.
• Unlimited growth potential. The sky’s the limit thanks to the sale of stock.
• No shareholders limit. However, once the company has $10 million in assets and 500 shareholders, it is required to register with the SEC under the Securities Exchange Act of 1934.
• Certain tax advantages. Enjoy tax-deductible business expenses.

Disadvantages of a C Corporation

• Double taxation. It’s inevitable as revenue is taxed at the company level and again as shareholder dividends.
• Expensive to start. There are a lot of fees that come with filing the Articles of Incorporation. And corporations pay fees to the state in which they operate.
• Regulations and formalities. C corps experience more government oversight than other companies due to complex tax rules and the protection provided to owners from being responsible for debts, lawsuits, and other financial obligations.
• No deduction of corporate losses. Unlike an s corporation (s corp), shareholders can’t deduct losses on their personal tax returns.

Ref :

https://www.irs.gov/businesses/small-businesses-self-employed/corporations

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations