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The label, "C-Corporation" merely refers to a standard,
general-for-profit, state-formed corporation. Characteristics of
the "C-Corporation" include the following:
Separate Legal and Tax Life. A
corporation which is properly formed and operated as a
corporation assumes a separate legal and tax life distinct from
its shareholders. A corporation pays taxes at its own corporate
income tax rates and files its own corporate tax forms each year
IRS Form 1120.
Management and Control. Normally, a
corporation's management and control is vested in its board of
directors who are elected by the shareholders of the
corporation. Directors generally make policy and major decisions
regarding the corporation but do not individually represent the
corporation in dealing with third persons.
Thus, transactions with third persons and day-to-day activities
are conducted through officers and employees of the corporation
to whom authority is delegated by the directors of the
corporation.
Shareholders. Shareholders are the
owners of a corporation. Although shareholders have no power
over the corporation's daily activities, shareholders possess
the ultimate power in that they can appoint or remove Directors
of the corporation.
Directors. The Board of Directors is
responsible for the long-term management and policy decisions of
the corporation. While the Directors are considered to have the
highest level of DIRECT control over the corporation, there are,
however, a few instances when the shareholders are required to
approve Actions of the Board of Directors (e.g. amendment to the
Articles of Incorporation, sale of substantially all of the
corporate assets, the merger or dissolution of the corporation,
etc...).
Corporate Officers. Corporate officers
are elected by the Board of Directors and are responsible for
conducting the day-to-day operational activities of the
corporation. Corporate officers usually consist of the
following: (President, Vice-President, Secretary, Treasurer).
Management & Staff. Management and Staff
are DIRECTLY responsible for the daily activities of the
corporation.
One Person Required. In most states, one
or more persons may form and operate a corporation. Some states,
however, require that the number of persons required to manage a
corporation be at least equal to the number of owners. For
example, if there are only two shareholders, there must also be
a minimum of two directors serving on the board.
Fringe Benefits. Corporations may often
offer their employees unique fringe benefits. For example,
owner-employees may often deduct health insurance premiums paid
by the corporation from corporate income. In addition,
Corporate-defined benefit plans often afford better retirement
options and benefits than those offered by non-corporate plans.
Corporate Formalities. To retain the
corporate existence and thus the benefits of limited liability
and special tax treatment, those who run the corporation must
observe corporate formalities. Thus, even a one-person
corporation must wear different hats depending on the occasion.
For example, one person may be responsible for being the sole
shareholder, Director, and Officer of the corporation; however,
depending on the action taken, that person must observe certain
formalities: Annual meetings must be held, corporate minutes of
the meetings must be taken, Officers must be appointed, and
shares must be issued to shareholders.
Most importantly, however, the corporation should issue stock to
its shareholders and keep adequate capitalization on hand to
cover any "foreseeable" business debts.
Shareholder Liability for Corporate Debts.
Where corporate formalities are not observed, shareholders may
be held personally liable for corporate debts. thus, if a thinly
capitalized corporation is created, funds are commingled with
employees and officers, stock is never issued, meetings are
never held, or other corporate formalities required by your
state of incorporation are not followed, a court or the IRS may
"pierce the corporate veil" and hold the shareholders personally
liable for corporate debts.
Avoiding Double Taxation. Generally, the
corporation is taxed for its own profits; then, any profits paid
out in the form of dividends are taxed again to the recipient as
dividend income and the individual shareholder's tax rate.
However, most small corporations rarely pay dividends. Rather,
owner-employees are paid salaries and fringe benefits that are
deductible to the corporation. The result is that only the
employee-owners end up paying any income taxes on this business
income and double taxation rarely occurs.
NOTE: See "The S-Corporation" below as a popular taxing
alternative for corporations.
Duration of a Corporation. As a separate
legal entity, a corporation is capable of continuing
indefinitely. Its existence is not affected by death or
incapacity of its shareholders, officers, or directors or by
transfer of its shares from one person to another.
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An S Corporation begins its existence as a "C-Corporation"
(discussed above) -- (i.e. as a general, for-profit corporation
upon filing the Articles of Incorporation with the appropriate
STATE office. However, after the corporation has been formed, it
may elect "S Corporation Status" by submitting IRS form 2553 to
the Internal Revenue Service (in some cases a state filing is
required as well).
Once this filing is complete, the corporation is taxed like a
partnership or sole proprietorship rather than as a separate
entity. Thus, the income is "passed-through" to the shareholders
for purposes of computing tax liability. Therefore, a
shareholder's individual tax returns will report the income or
loss generated by an S corporation.
Qualifying for S Corporation Status. To
qualify as an S corporation, a corporation must timely file IRS
Form 2553 with the IRS. This election must be made by March 15
of the current year if the corporation is a calendar-year
taxpayer in order for the election to take effect for the
current tax year.
However, a "New" corporation may make the filing at anytime
during its tax year so long as the filing is made no later than
75 days after the corporation has began
conducting business as a corporation, acquired
assets, or has issued stock to
shareholders (whichever is earlier).
To qualify for S corporation status, the corporation must:
 | Be filed in one of the 50 United
States.
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| Maintain only one class of stock.
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| Maintain a maximum of 75 shareholders.
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| Be comprised SOLELY of shareholders who are
individuals, estates or certain qualified trusts,
who consent in writing to the S corporation election.
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| NOT have a shareholder who is a non-resident
alien.
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Losing S-Corporation Status. Failure to
observe ANY of the above requirements could revoke S-Corporation
status at any time. An S-Corporation that loses its status as
such may not re-elect S-Corporation status for a minimum of five
years.
Corporate Formalities. An S-Corporation
follows the same state formalities as does a C-corporation (i.e.
filing Articles of Incorporation and paying state fees).
IRS Filings. The S-Corporation must
complete and file IRS Form 1120s to report its annual income to
the IRS each year.
General Shareholder Requirements. ALL
shareholders of the corporation must be U.S. Citizens or have
U.S. Residency Status. If, for any reason, shares are somehow
sold or transferred (even if by will, divorce, or other means)
to a shareholder who is a foreign national, the corporation will
lose its S-Corporation status and be treated as a C-Corporation.
Who Should Elect S-Corporation Status?
Owners who want the limited liability of a corporation and the
"pass-through" tax-treatment of a partnership will often make
the S-Corporation election. In most cases, corporations that
would benefit from S-Corporation status are those who plan on
distributing the majority of earnings to its shareholders in the
year those earnings are realized.
Corporations who plan on retaining earnings for future
investments in future tax years often choose the C-Corporation
because, under the S-Corporation, earnings will be taxed as if
they were distributed to shareholders regardless of whether a
distribution actually occurred or whether the corporation
retained the earnings for future investment.
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Rules governing the Limited Liability Company (L.L.C.) are
usually distinct from the rules and laws governing corporations.
In general, however, the L.L.C. is a state-created entity
intended to provide it's members / owners with the limited
liability afforded to corporate shareholders while minimizing
many of the formalities corporations are required to observe.
If you are considering forming an L.L.C., you should be aware of
the following facts:
IRS Treatment of the Two-Member LLC . If
your LLC has two or more owners, The IRS will tax the
LLC owners
as if the owners were members of a partnership. A partnership
files Form 1065 (U.S. Partnership Return of Income).
IRS Treatment of the One-Member LLC . An
LLC with only one member / owner is taxed by the IRS as a sole
proprietorship is taxed. Thus, the sole member of an LLC will
file (Form 1040), (U.S. Individual Income Tax Return) and will
include (Form 1040, SCHEDULE C) (Profit or Loss from Business)
with his/her tax returns.
"Tax My LLC as a Corporation!"
Regardless of how many members the LLC has, the LLC may file an
Election to be Treated as a Corporation for Purposes of Taxation
(IRS Form 8832). If an election is made to be treated as a
corporation, the LLC must file Form 1120 (U.S. Corporation
Income Tax Return). IRS Form 1120, Form 1120 Instructions
Minimum Members Required by State Law.
Traditionally, most states have required that an LLC consist of
two or more members (owners). Recently, however, the majority of
states are allowing single-member LLC s.
Separate Legal Entity Status. Similar to
the corporation, an LLC is recognized as a separate legal entity
from its "members." Thus, an LLC can own property, commit itself
to contractual obligations, and even commit crimes.
Limited Liability for Members (owners).
In most cases, only the LLC is responsible for the company's
debts thus shielding its members from personal liability.
However, there are some exceptions where individual members may
be held liable:
1. Guarantor Liability. Where an LLC member
has personally guaranteed the obligations of the LLC , he or she
will be liable. For example, where an LLC is relatively new and
has no credit history, a prospective landlord about to lease
office space to the LLC will most likely require a personal
guarantee from the LLC members before executing such a lease.
2. Alter Ego Liability. Where an LLC member
has personally guaranteed the obligations of the LLC , he or she
will be liable. For example, where an LLC is relatively new and
has no credit history, a prospective landlord about to lease
office space to the LLC will most likely require a personal
guarantee from the LLC members before executing such a lease.
Fewer Formalities than the Corporation.
Although a corporation's failure to hold shareholder or director
meetings may subject the corporation to alter ego liability,
this is not the case for LLC s in most states. An LLC 's failure
to hold meetings of members or managers is not usually
considered grounds for imposing the alter ego doctrine where the
LLC 's Articles of Organization or Operating Agreement do not
expressly require such meetings.
Shared Management and Control.
Management and control of an LLC is vested with its members
unless the articles of organization provide otherwise.
Voting Interest According to Ownership.
Ordinarily, voting interest directly corresponds to interest in
profits which directly corresponds to share of ownership unless
the articles of organization or operating agreement provide
otherwise.
Transfer Requires Majority Consent. No
one can become a member of an LLC (either by transfer of an
existing membership or the issuance of a new one) without the
consent of members having a majority in interest (excluding the
person acquiring the membership interest) unless the articles of
organization provide otherwise.
Perpetual Duration. Traditionally, most
states did not allow an LLC to have a perpetual existence;
LLC s
were traditionally required to specify the date on which the
LLC 's existence would terminate. Today, however, most states
allow a perpetual duration for an LLC if stated in its articles
of organization.
Dissolution Upon Certain Events. Unless
otherwise provided in the articles of organization or a written
operating agreement, an LLC is dissolved at the death,
withdrawal, resignation, expulsion, or bankruptcy of a member
(unless within 90 days a majority in both the profits and
capital interests vote to continue the LLC ).
Operating Agreement Required. To validly
complete the formation of the LLC , members must enter into an
Operating Agreement. This Operating Agreement may come into
existence either before or after the filing of the Articles of
Organization and depending on your particular state's laws, may
be either oral or in writing.
Different Laws in Different States.
While laws governing corporations have grown to be quite uniform
amongst the different states over time, LLC statutes can vary
quite drastically from state to state. This is most likely due
to the fact that the LLC is a VERY new form of
business
structure only recently recognized by most governments (e.g.
Hawaii only recently began recognizing the LLC as a legitimate
form of business in 1997.
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Related Articles:
Corporation vs.LLC
S Corp vs. LLC |
