S and C Corporations
Advantages of a Corporation
In addition to the limited liability protection enjoyed by shareholders, a corporation offers many other advantages over other types of entities:
Ownership interests in the business are freely transferable:
the ready transferability of shares in the corporation facilitates estate planning;
Shares of the company may be sold to investors in order to raise capital;
Corporations, to a much greater extent sole proprietorships and partnerships, may take advantage of pension plans, medical payment plans, group life and accident plans, and other fringe benefits available under the Internal Revenue Code.
A corporation exists forever, so long as corporate regulations are met. There is no need to cease operations if a shareholder, director, or officer dies.
How a Corporation is Taxed: C and S Corporations
A “for-profit” corporation may be taxed in one of two ways: under Subchapter C of the Internal Revenue Code (a “C” Corporation) or under Subchapter S of the Internal Revenue Code (an “S” Corporation). A corporation taxed at the entity level is known as a C corporation. Income that has been taxed at the entity level will again be taxed if, and when, is distributed as dividends to shareholders. This double taxation is, perhaps, the single greatest disadvantage to operating a business as a corporation. However, S Corporations may avoid much of this double taxation.
Requirements for S Corporation Election
To elect to be treated as an S Corporation, certain requirements must be met and an election form must be filed with the IRS. The main requirements are:
There may be no more than 100 shareholders;
Only one class of stock is permitted;
Shareholders must be individuals , estates, or certain types of trusts, and must not be nonresident aliens;
If a corporation elects to be taxed as an S Corporation and meets the requirements, it will be taxed at the federal level very similarly to partnerships and limited liability companies. That is, the income, losses, and gains will be passed through directly to the shareholders and there will be no tax “at the entity level.”