Many investors are interested in C Corporations and S Corporations. The following will discuss about the differences between them in terms of formation and taxation.
C Corporations vs. S Corporations: Formation
The C Corporation is the default corporation under Internal Revenue Service (IRS) rules. A C Corporation can elect to be taxed as an S Corporation by filing Form 2553 with the IRS. Please note while most states follow the federal S Corporations election, some jurisdictions do not recognize the S Corporations (e.g. New York City) or require separate state elections (e.g. New York State, State of New Jersey).
To obtain S Corporation tax status for a certain year, you should complete the Form 2553 no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year preceding the tax year it is to take effect.
IRS requires S Corporations cannot have more than 100 shareholders; issue more than one class of stock; have shareholders who are not U.S. citizens or residents; be owned by corporations, other S corporations (with some exceptions), LLCs, partnerships or many trusts. While C Corporations do not have above restrictions.
C Corporations vs. S Corporations: Taxation
C Corporations are separately taxable entities. They are subject to double taxation. C Corporations file the Form 1120 and pay the corporate income tax. Then the after-tax income distributed to shareholders as dividends will be taxed again and are reported by the shareholders on their personal tax returns.
On the other hand, taxation is fairly simple for the S Corporations. S Corporations are pass-through taxation entities. They file the information federal return (Form 1120S), but do not pay tax at the corporate level. The profits/losses are passed through the S Corporations to the shareholders and are only taxed to the shareholders on their personal tax returns.
All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage.
TCJA was limits excess business losses for noncorporate taxpayers. Excess business loss is disallowed as a deduction. The loss amount that is disallowed is the aggregate of all trade or business deductions/losses over gross income/gains from such trades or businesses, less a threshold of $250,000 (or $500,000 if married filing jointly; it will be annually adjusted for inflation).
Physical presence was previously the only consideration where income tax nexus is concerned. But this standard was largely replaced by an economic presence/factor presence nexus concept by many states. Just like the sales tax nexus, the income tax nexus better fits the expanding use of e-commerce. States using the economic presence/factor presence nexus standard can impose tax on qualified out-of-state companies, even if they do not have a physical presence in the state.
A corporation's disposing of all (or “substantially all") of its assets, “not in the ordinary course of business," is a fundamental change. Differently, it is not a fundamental change for the company buying the assets. Thus, the shareholders of the buying corporation do not get to vote on the transaction, and do not have rights of appraisal.
Usually, Company combinations are undertaken as a way for one company to acquire another. There are different ways to accomplish this goal. The choice will depend not only on corporate law, but on business and tax considerations. This article will discuss some different ways in which separate business entities may be combined.