We recently dedicated a blog post explaining the different types of business structures available. This post is meant to explain how a corporation can be further characterized by understanding what exactly S-Corporations and C-Corporations are.

A corporation, once it is incorporated through the California Secretary of State, can elect to be taxed as an S-Corporation by the Internal Revenue Service. All of the shareholders of the corporation must consent to the election. Electing to be treated as an S-corporation preserves the corporation’s characteristics of operating as a separate entity from the shareholders for all legal purposes, but adds the benefit of “pass through” taxation to the shareholders.

A C-Corporation, without an S-Corporation election, faces double taxation, meaning that the corporation is taxed both at the corporate level as well as the shareholder level. However, when a corporation elects to be treated as an S-Corporation, it will only be taxed at the shareholder level. This means that any income earned by the corporation or any losses sustained by the corporation will not be taxed at the corporate level, and then again to the shareholders. Instead, each shareholder is personally responsible for any income or losses that pass through to him or her.

We recommend this election when a company is just starting out and is closely held. While this all might be appealing to you, you must remember one thing: the IRS must decide whether or not your corporation meets all of the requirements to be treated as an S-Corporation. To qualify, a corporation is required to have the following:

1) No more than 100 shareholders;

2) It has to be a corporation that was formed under the laws of the United States, thus it cannot be a “foreign” corporation;

3) All shareholders must be US Citizens or US residents;

4) Shareholders can be individuals or trusts. A shareholder cannot be another corporation, limited liability company (LLC) or partnership; and

5) The corporation can only have one class of stock.

Not only must your corporation meet the abovementioned requirements, but it must also timely file the election with the IRS. Failing to timely file might require additional paperwork to the IRS. Another point to consider is that if at any time during the corporation’s existence, the corporation does not meet one of the requirements mentioned above, then it will lose its S-Corporation tax status.

We help our clients understand the benefits and disadvantages of any type of corporate filing. If you would like to further discuss your corporation’s needs, please feel free to call our office and schedule a complimentary consultation.

Glendale Location

616 E. Glenoaks Boulevard, Suite 203

Glendale, CA 91207

Sherman Oaks Location

15303 Ventura Boulevard, Suite 900

Sherman Oaks, CA 91403