Corporation

A corporation carries the benefit of limited liability, which means that shareholders and owners are not personally responsible for the company’s obligations. 

Corporations are owned by shareholders and managed by officers and directors. 

Corporations are treated as “legal persons” and can hold title to property, enter contracts, and have the right to sue and be sued. The death of a shareholder does not alter a corporation’s structure as a corporation has perpetual life.

C corporations are a good choice for medium or higher-risk businesses, those that need to raise money, and those that plan to “go public.”  

For Federal income tax purposes, corporations are usually taxed as either a C corporation or an S corporation.  The corporation is filed with the state as a corporation and then it can make one of these tax elections with the IRS.  

At a high level, the difference between a C corporation and S Corporation is the concept of “double tax.”  The C corporation is subject to a “double tax.” Profits are first taxed at the corporate level and then taxed a second time when distributed to individual shareholders.  Thus, the C corporation files its Form 1120 income tax return and pays tax with that return.  Then if that tax return reports any distributions to the shareholders, those distributions are taxed on the shareholder’s individual income tax returns.  This is the double tax problem.

An S corporation is an election a corporation can make.  To qualify for S corporation status, the corporation must meet special requirements, such as not having too many shareholders, not having foreign shareholders, etc.  The S corporation election can help avoid double taxation incurred by C corporations.  S corporations allow profits and some losses to “pass-through” directly to owners’ income without being subject to corporate tax rates.  Thus, the corporation files its Form 1120S income tax return and does not pay tax with that return.  Instead, the net profit and other items are reported on a Schedule K-1 that pulls over to the shareholder’s individual income tax return.  The shareholder then pays tax on the net profits and other items on their individual income tax return.  This is just one level of tax.