In: Finance
What is a C corporation and a S corporation?
How does a partnership relate to it?
When commencing a business or changing its structure,one of the most common questions Entrepreneurs ask is this topic itself. The C corporation is the standard (or default) corporation under IRS rules.The S corporation is a corporation that has elected a special tax status with the IRS and therefore has some tax advantages.Both business structures get their names from the parts of the Internal Revenue Code that they are taxed under. C corporations are taxed under Sub chapter C while S corporations are taxed under Sub chapter S. To elect S corporation status when forming a corporation, Form 2553 must be filed with the IRS and all S corporation guidelines met.
Below are the some advantages of choosing C corporations and S corporations:
Limited liability protection: Corporations offer limited liability protection, so shareholders (owners) are typically not personally responsible for business debts and liabilities. This is true whether it is taxed as a C corporation or an S corporation.
Separate legal entities: Corporations (C corps and S corps) are separate legal entities created by a state filing.
Filing documents: Formation documents must be filed with the state. These documents, typically called the Articles of Incorporation or Certificate of Incorporation, are the same regardless of whether you choose to be taxed as an S corporation or C corporation.
Structure: S corps and C corps have shareholders, directors and officers. Shareholders are the owners of the corporation, but it is the corporation that owns the business. The shareholders elect the board of directors. The board oversees and directs corporation affairs and decision-making but is not responsible for day-to-day operations. The board elects the officers to manage daily business affairs.
Corporate formalities: The state corporation laws make no distinction between C corporations and S corporations when it comes to compliance responsibilities. All corporations are required to follow the internal and external corporate formalities and obligations, such as adopting bylaws, issuing stock, holding shareholder and director meetings, maintaining a registered agent and registered office, filing annual reports, and paying annual fees.
Relationship of Partnership
Mainly, S Corp is treated similar to a sole proprietorship or a partnership. The profits (or losses) are passed through the S Corp to the shareholders, and are only taxed to the shareholders and reported on their personal tax returns.
For Example: Suppose you are the only shareholder of your corporation. The corporation has a profit of Rs.100,000. If you have a C Corp, the corporation would pay a corporation tax of 28% (or Rs.28,000), leaving you to receive a dividend of Rs.72,000. You would then pay personal income tax on the dividend. Assuming for our example, a tax rate of 20%, you would pay Rs.20,160 and be left with Rs.51,840. If you have an S Corp, there would be no corporation tax to pay, and the full Rs.100,000 profit would pass through to you as a dividend. You would then pay the 20% personal tax rate on that, or Rs.20,000. That would leave you with Rs.80,000 (or Rs.28,160 more than with a C Corp).
Hence, we can say that there exist some similarities between Partnership and S Corp.