Now you must be wondering what a C or S corporation even is – to put it in simple terms, a C Corporation is any corporation that is taxed separately from its owners, according to federal income tax law in the United States of America. On the other hand, a S corporation is a corporation that is not taxed separately from its owners. For US federal income tax purposes, most companies are usually considered as C Corporations.
Both S and C corporations offer some kind of financial protection – for example, if a business is legally incorporated, creditors cannot seize the personal assets of the owners to meet the debt of the company.
Requirements to be a S Corporation:
The requirements to be considered an S corporation are slightly stricter than the requirements for being considered a C corporation. The requirements are:
1. Shareholders cannot be partnerships or other corporations. Shareholders can only be individuals, certain trusts, estates, and some other organizations such as non-profit organizations.
2. All the shareholders of the company must be US citizens or permanent residents.
3. The maximum number of shareholders the business can have is 100.
4. The business may issue only one type of stock or share.
5. The profits earned or losses incurred may only be allocated to the shareholders or owners in certain predetermined proportions.
6. The business must not be an insurance company, domestic international sales corporation, possession corporation, or any other type of ineligible corporation.
7. All shareholders must consent to the election.
Requirements to be a C Corporation:
Being considered a C Corporation has a slightly higher amount of benefits, and has fewer requirements, which is why a majority of companies fall under this category. The requirements to be considered a C Corporation are the following:
1. The company must hold an AGM or Annual General Meeting every year for Board of Directors and all the shareholders of the company. Here, they discuss and decide upon important information, make strategic decisions and look at opportunities and risks the business will face.
2. They company must issue shares to investors so that they may claim an ownership over the business. The corporation’s management is governed by a Board of Directors who are appointed by these aforementioned investors.
3. The company must elect a Board of Directors to manage the activities of the company on a daily business. They are also responsible for drafting bylaws for the corporation which are written protocols for how the corporation will be governed.
4. The company must also assign individual stakeholders in the company into theses position: shareholders, directors, officers and employees.
These are the major differences in C and S corporations and the advantages offered by them.