C & S Corporations
Written by Roger P. Croteau :: www.croteaulaw.com :: 1.702.254.7775 Friday, 08 August 2008 15:32
Corporations
One of the most consistently dynamic business entities is the corporation. Offering tremendous flexibility and advantages that generally outweigh all other business entities, the corporation is the most secure entity in business. Because a corporation is considered a 'person' with rights of its own under the law, a stockholder (owner or partial owner) is a holder of shares of stock in the corporation and is NOT IN LEGAL DANGER for the acts of the corporation. In other words, you, as the owner, are not responsible. You are not the employer of those working for the corporation nor are you the owner of corporate property. In addition, a corporation is a citizen in the state wherein it was created and does not cease to be a citizen of its state of domicile by engaging in business or acquiring property in another state.
The important point to remember is that, when you own a corporation, it exists as a completely separate entity or ‘person’. You can live anywhere you choose because it is the corporation's 'state of residence' that dictates the requirements. You will find that a Nevada corporation provides the greatest benefits for protecting you and your business.
But it doesn't end there; corporations vary in their formation and organization. You will need to select from various types. The two typical corporations that most CPA's or attorneys will recommend are S and C corporations. In explaining the differences between S and C corporations, one should keep in mind that every state has different laws for corporations. What an accountant may tell someone in California may not be true in Nevada.
C Corporation
* Allows for limited liability of the owners/officers/directors.
* Runs on a fiscal year, which may be designated by the board of directors, rather than on a calendar year.
* Nevada does not require corporate owners to be on record - protecting your identity.
* Profits are taxed at corporate rates on an 1120 return separate from the individual return.
* Profits can be kept as retained earnings.
C corporations offer more protection and options for business owners in almost every case;
* In almost every category, C corporations will pay less in tax than an individual. The C corporation tax table is the only one in which the tax rate drops when you start making millions. That's why every Fortune 500 company is a C corporation.
* C corporations have no limitations on shareholders. Shareholders can live anywhere in the world and can be any type of entity.
* There are far fewer criteria for a C corporation, as compared with an S corporation, so you have the options you need to meet your objectives.
C corporations will give you the most flexibility, which is why Nevada Corporate Headquarters Inc., recommends them in most instances.
S Corporation
S corporation is a good option if you are incorporating a small business.
1. Allows for limited liability of the owners/officers/directors.
2. Typically runs on a calendar year.
3. Full disclosure of corporate owners.
4. Profits pass through to the individual tax return 1040. No tax brackets separate from the personal tax brackets apply.
5. All profits are taxed even if not distributed.
State taxes will apply for individuals who are located in a state with an individual state tax. Nevada has no state corporate tax of any kind.
There are certain qualifications that the corporation must meet in order to elect S corporation status. To elect S corporation status, your corporation must meet all of the following requirements.
* It must be a domestic corporation formed in the U.S.A.
* It may have no more than 75 shareholders.
* It may only have individuals, estates or certain trusts as shareholders.
* It may not have non-resident alien shareholders.
* It may only have one class of stock.
* It must be a small business corporation (financial institutions, such as banks, insurance companies, building and loan associations or mutual savings and loan associations, cannot take advantage of an S corporation election).
* It must conform to state statutory restrictions, which limit the transfer of shares/ownership of the company.
Corporations vary in their formation and organization. A corporation is not just a corporation. You will need to select from various types. The two typical corporations that most CPA's or attorneys will recommend are S and C corporations. In explaining the differences between S and C corporations, one should keep in mind that every state has different laws for corporations. What an accountant may tell someone in California may not be true in Nevada.
Comparison of C Corporations & S Corporations
S Corporation
- Allows for limited liability of the owners/officers/directors.
- Typically runs on a calendar year.
- Full disclosure of corporate owners.
- Profits pass through to the individual tax return 1040. No tax brackets separate from the personal tax brackets apply.
- All profits are taxed even if not distributed.
- State taxes will apply for individuals who are located in a state with an individual state tax.
C Corporation
- Allows for limited liability of the owners/officers/directors.
- Runs on a fiscal year, which may be designated by the board of directors, rather than on a calendar year.
- Nevada requires no disclosure of corporate owners.
- Profits are taxed at corporate rates on an 1120 return separate from the individual return.
- Profits can be kept as retained earnings.
- Nevada has no state corporate tax of any kind.
Comparison of S Corporations & C Corporations
Comparison of Business Entities
|
Entity: |
C-corporation |
S-corporation |
LLC |
Partnership |
|
Tax Rate |
Graduated tax rates of up to 35% apply to taxable income over $18.3 million. Personal service corporations are taxed at the 35% rate on all income. |
There is no tax to the S corporation except in two limited circumstances: 1) Recognized built-in gains, and 2) Excess passive net income. |
There is no tax to the LLC on LLC income. All items of income, gain or loss pass through and are taxed to the members. |
There is no tax to the partnership for partnership income. All items of income, gain or loss pass through and are taxed to the partners. |
|
Eligible Owners |
There are no restrictions on eligible owners. |
May not have more than 100 shareholders. May not have non-individual shareholders, subject to certain exemptions. |
There are no restrictions on eligible owners. |
There are no restrictions on eligible owners. |
|
Types of Ownership Interest |
Stock. There may be different classes of stock. |
Stock. There may be only one class of stock. However there may be voting and non-voting common stock. |
Membership Interests. There may be different classes of membership interests. |
General and Limited partnership units. There may be different classes of partnership interests. |
|
Special Allocations |
Special allocations are not permitted. Dividends must be paid on stock ownership. |
Special allocations are not permitted. Income, gain, and loss all pass through to the shareholders based on stock ownership. |
Special allocations are permitted if the allocations have substantial economic effect. |
Special allocations are permitted if the allocations have substantial economic effect. |
|
Transferability of Ownership Interest |
There is limited liability for shareholders, officers and directors. This protection is generally extended to agents and employees as well. |
There is limited liability for shareholders, officers and directors. This protection is generally extended to agents and employees as well. |
There is limited liability for shareholders, officers and directors. This protection is generally extended to agents and employees as well. |
All partners in a general partnership are personally liable without limits. The general partner in a limited partnership is personally liable without limits. There is limited liability for limited partners in a limited partnership to the extent that they do not act as a general partner in assuming management responsibilities of the partnership. |
|
Duration |
A C corporation continues indefinitely. |
An S corporation continues indefinitely. |
An LLC dissolves at the time specified in the operating agreement, or upon the loss of a member (unless the other members agree to continue the LLC). |
A partnership terminates at the time specified in the partnership agreement or when there is more than a 50% change in partnership interests during any 12 month period. |
|
Management |
Managed by officers and directors. |
Managed by officers and directors. |
Managed either by all members, or by specifically designated managers. Members who participate in management are not personally liable. |
Managed by general partners. Limited partners who participate in management are personally liable. |
|
Liabilities and Basis |
Liabilities incurred by the corporation do not increase the shareholder's basis in the stock. |
Liabilities incurred by the corporation do not increase the shareholder's basis in the stock. |
Liabilities incurred by the LLC increase a member's basis in his/her membership interest. |
Liabilities incurred by the partnership increase a partner's basis in his/her partnership interest. |
|
Pass-Through of Losses |
Losses may not be passed through to or be deducted by shareholders. |
Losses may be passed through to and be deducted by shareholders, subject to certain restrictions, including the basis, at-risk and passive loss limitations. |
Losses may be passed through to and be deducted by members, subject to certain restrictions, including basis, at-risk and passive loss limitations. |
Losses may be passed through to and be deducted by partners, subject to certain restrictions, including basis, at-risk and passive loss limitations. |
|
Fringe Benefits |
Losses may not be passed through to or be deducted by shareholders. |
Losses may be passed through to and be deducted by shareholders, subject to certain restrictions, including the basis, at-risk and passive loss limitations. |
Losses may be passed through to and be deducted by members, subject to certain restrictions, including basis, at-risk and passive loss limitations. |
Losses may be passed through to and be deducted by partners, subject to certain restrictions, including basis, at-risk and passive loss limitations. |
|
Fiscal Year |
May use any fiscal year. Personal Service Corporations must use a calendar year, subject to certain exceptions. |
Must use a calendar year, subject to certain exceptions. |
Must use the tax year of members having a majority interest in the LLC, or the tax year of all members if there is no majority interest. |
Must use the tax year of partners having a majority interest in the partnership, or the tax year of all principal partners if there is no majority interest. |
|
Tax Upon Sale or Distribution of Appreciated Assets |
There is potential double taxation. There is a tax imposed at the corporate level upon the sale or distribution of appreciated assets. Additionally, there is a potential dividend or capital gains tax upon the distribution of sale proceeds to shareholders. |
There is a single tax at the shareholder level upon the sale of appreciated assets. There is also a potential built-in gains tax at the corporate level if the corporation had appreciated property at the time of conversion from a C corporation to an S corporation. |
There is a single tax at the member level upon the sale of appreciated assets. Generally, there is no tax upon the distribution of appreciated assets. |
There is a single tax at the partner level upon the sale of appreciated assets. Generally, there is no tax upon the distribution of appreciated assets. |
|
Tax to Entity Upon Liquidation |
Taxed on appreciation in assets upon the sale or distribution of assets. This may result in double taxation as these proceeds are distributed to shareholders. |
There is no tax except for a potential built-in gains tax if a C corporation was converted to an S corporation in the prior 10 years. |
There is no tax upon the sale or distribution of assets. Gain upon the sale of assets passes to the members. |
There is no tax upon the sale or distribution of assets. Gain upon the sale of assets passes to the partners. |
|
Tax to Owners Upon Liquidation |
Gain is recognized to the extent that fair market value of property distributed exceeds the shareholder's basis in his/her stock. |
Gain is recognized to the extent that the fair market value of property distributed exceeds the shareholder's basis in his/her stock. |
Gain realized upon the liquidating sale of appreciated assets passes to the members. No gain is recognized upon distribution except to the extent that the money distributed exceeds the member's basis in his membership interest. |
Gain realized upon the liquidating sale of appreciated assets by the partnership passes to the partners. No gain is recognized upon distribution except to the extent that the money distributed exceeds the partners basis in his partnership units. |
|
Single Owner Issues |
May have a single shareholder. |
May have a single shareholder. |
Single-members LLCs are disregarded entities for federal tax purposes. Some states require a minimum of two members. Charging order protection for the LLC member is challenged because there are no innocent members to protect. |
A single partner partnership is called a sole proprietorship. |
|
Charging Order Protection for Innocent Owners |
Charging order protection is not available for shareholders except in Nevada, subject to certain limitations. |
Charging order protection is not available for shareholders except in Nevada. |
Charging order protection generally applies to innocent members. |
Charging order protection generally applies to innocent partners. |
|
Self-Employment Taxes |
Shareholder-employees are not subject to self-employment tax. The corporation pays the employer's portion of the withholding tax which equals the self-employment tax. Self-employment tax does not apply dividends or distributions paid to shareholders. |
Shareholders do not pay self-employment taxes on dividends. They pay self employment tax only on salary payments, provided they receive reasonable compensation for their services. It is generally thought that an S corporation can save a substantial amount of self-employment taxes in many cases when compared to LLC members in the same economic circumstance. |
Managers may be subject to self-employment taxes on their distributive portion of income, whether or not distributed. |
Limited partners are not subject to self-employment taxes except for guaranteed payments for services to the partnership. General partners may be subject to self-employment taxes. |
C corporation status is appropriate for:
- When owners live outside the country
- When owners live in a state with a state income tax
- When several individuals or other entities are involved in ownership
S corporation status is appropriate for:
- Companies expecting start-up losses during the initial years of operation.
- Companies with no intent of going public in the future.
- Companies that do not expect to issue multiple classes of stock.
- Companies that might be subject to the Alternative Minimum Tax.
- Owners live in a state with no personal state income tax.
LLC status is appropriate for:
- When the business is a partnership
- When real estate is owned for investment purposes
- When several entities own the business
- When the owner is seeking complete protection from personal liability
The best entity for building business credit for your company is one that will:
- Separate you from your business
- Have its own federal tax identification number
- Separate your company's business debt from owners/officers
The business entities that provide these are the following:
- S Corporation
- C Corporation
- Limited Liability Company (LLC)
While these are favorable business entities, there are benefits to the sole proprietorship and limited partnership business entities.
We will work with you no matter which entity you choose.
Please contact Roger P. Croteau & Associates, Ltd. for further information.
