Corporations and Taxes

C Corporations are the only non pass-through business structure. They report their income and expenses on a separate tax return (IRS Form 1120) and pay taxes on their net income at a separate corporate tax rate. This rate may often be lower than your corresponding personal tax rate – one of the reasons C Corporations can be so attractive for tax planning.

S Corporations are pass-through structures. They file a tax return reporting income and expenses (IRS Form 1120S) but the net profit or loss is then distributed out to the owners to pay taxes on at their personal rate.

In fact, the only real differences between a C Corporation and an S Corporation are tax treatment and ownership. The “C” and “S” designators are given by the IRS. That’s why you don’t see any difference in the Articles of Incorporation.

The ownership rules for C and S Corporations are quite different. C Corporations may be owned by individuals or entities, who may or may not be U.S. citizens, and who may or may not live in the United States. There is no restriction on how many owners a C Corporation can have – which is why these are the entities that are publicly traded.

On the other hand, S Corporations are restricted by all these things. There can be a maximum of 100 shareholders, and all shareholders need to be individuals who live and pay taxes in the United States. You can play with these rules a little. For example, you don’t need to be a U.S. Citizen, but you do need to live here, and file a U.S. tax return each year. Related parties, like families, can often be counted as one shareholder, even though they may each own shares separately. And, you can hold your S Corporation shares in a trust, as long as the trust is specially written to allow for the share ownership.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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