The S and C Corporation

1.   The S Corporation

An S corporation is a corporation that has filed IRS Form 2553, choosing to have all profits taxed to the shareholders rather than to the corporation. Not all corporations are eligible for S corporation status. The S corporation can have no more than 75 shareholders. These shareholders must be individuals or certain types of trusts, estates or tax-exempt organizations. The company may only have one class of stock, or more than one class if the only differences are voting differences. All shareholders must be “natural” persons (this means an actual human being, rather than a legal “person” like a corporation). They cannot be non-resident aliens.

An S corporation files a corporate tax return, but pays no federal tax. The profit shown on the S corporation’s tax return is reported on the owners’ tax returns. In some states, even an S corporation must pay a corporate excise tax.

If an entity begins as an S corporation, but then violates one of the criteria required to remain an S corporation, it converts automatically by operation of law to a C corporation. No filing is required. A corporation can also voluntarily elect to terminate its S corporation status.

2.   The C Corporation

A C corporation is any business corporation that has not elected to be taxed as an S corporation. A C corporation pays income tax on its profits, unlike an S corporation, which does not. If a profitable C corporation then pays dividends to its shareholders, the income is taxed an additional time at the shareholder level, thus taxing the same revenues twice.

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