Question

How do stock ownership requirements differ for a C and S corporation? Is there a difference in income reporting by the shareholders because of the difference? Explain.

Brooklyn and Bronx Corporation decides to change from a C corporation to an S corporation. What are the advantages of the S corporation status compared to the C corporation? As a client of yours, what would you advise Brooklyn and Bronx Corporation to do? Why?

Answer 1

Differences in Stock ownership requirements :

C corporation	S corporation
1. They can have unlimited no. of shareholders.	They can have only upto one hundred share holders.
2. Foreign Investors can also have a part in share holding.	Share holders must only be US citizens or permanent residents excluding non-resident aliens.
3. It can be owned by others corporations, LLC and trusts.	It cannot be owned by a C corporation, S corporation or any other corporation, LLC or trusts.
4. They have different classes of stock	They have only one class of stock.
5. Share holders at top or the founders/owners have the most control over the voting.	All share holders have equal voting rights.

Due to the difference in ownership requirements, there is a difference between Income reporting process too.

C corporation may be taxed twice. Once, at the time of filing the corporate income tax return in Form 1120 and the other, when the owner files his personal income tax return if the corporate income is distributed amongst share holders as dividends. While S corporation is subject to pass through taxation. Each share holders part of the business's income and losses pass through their personal income tax return and is taxed at personal income tax rate.

Advantages of S corporation over C corporation.

1. It is a pass through taxation.

2. 20% reduction in business income which reduces the tax burden.

3. No double taxation.

4. Liability is limited.

5. Even if owner is not there, the S corporation shall continue to exist. Hence, perpetual existence.

It is advisable in the best interest of Brooklyn and Bronx Corporation to change from C corporation to S corporation because of the number of benefits of S corporation over C corporation. Hence, saving tax burden and tax filing requirements.