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NOTE: Corporations are formed generically—the S or C status is established after formation when you apply for your EIN number on IRS form SS-4. If you are unsure whether you need an S or C corporation, the following may be of some help. The information in this section is however, far from complete. You should not make a final determination without the advice of professional tax or legal counsel.
An S corporation as referred to in the Internal Revenue Code is one which when properly instituted, does not pay federal corporate taxes; instead passing through net income and losses on a prorate basis to its stockholders, who include their portion of the earnings or losses on their individual returns for that year. Corporations that are not "S" corporations are considered "C" corporations. Though not a complete list, several major differences from a C corporation stand out. Some S Corporation requirements are:
1. All stockholders must agree to and are bound by the S status.
2. The corporate tax year must end in December.
3. There is a limit of 75 stockholders and stockholders must be an individual, an estate or a trust.
4. Stockholders cannot be nonresident aliens and stock may only be of one class.
5. S corporations must be domestic corporations.
6. S corporations cannot be financial or insurance companies and cannot be used for going public.
7. Most states will tax S corporations. (Nevada will not.)
8. Shareholders cannot control taxable income to themselves.
9. Certain fringe benefits are denied by the IRS.
S-Corporation notes: DIVIDENDS don't usually apply to S-Corporations unless it was a C-Corp for one or more years before it made the S election. If you corp has always been an S-Corp, you don't have dividends.
Quote from the IRS: "Tax practitioners and Subchapter S Shareholders need to be aware that revenue ruling 74-44 states that the Internal Revenue Service (IRS) will re-characterize small business corporation dividends paid to shareholders as salary when such dividends are paid to the shareholders in lieu of reasonable compensation for services." If you do not want any of the restrictions listed above, then you may wish to consider a "C" corporation.
C-Corporation notes: DIVIDENDS issued may provide tax savings under 2003 tax laws (until congress takes it away). Too detailed to discuss here. Call your tax advisor! If the corporation intends to reinvest its profits in the near future, S status would probably not be the best choice, since there would be no threat of double taxation with the C status. If you anticipate significant losses during the start up years and the stockholders have tax basis obligations worthy of reduction due to such losses, then S status may be the right choice. Before deciding which entity is best, consider the following:
• Your anticipated (corporate) taxable income in the first few years.
• Your anticipated (individual) tax obligations in the first few years.
• Your corporate plans towards reinvesting profits.
• Your concern about the restrictions or opinions noted above.
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CHQ Incorporated provides business incorporating and resident agent services. We are not a law or legal services firm and do not render legal advice or counsel. We strongly advise that you consult with an attorney prior to forming or operating any legal entity.
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