While both types are separate legal entities from their owners (shareholders), only C-Corporations operate as a separately taxed entity from their owners.

This means that the shareholders, employees, owners of a C-corporation pay tax on their personal salary, while the corporate profits are taxed separately (and often at a lower rate). The downside to this is that when the after-tax profit is dispersed as dividends, it is taxed again (although tax laws do change from time to time).

S-corporations are not treated as separate taxable entities like C-Corporations. Because of this, net income is passed through the S-Corporation to the personal income tax of the owner(s).

What does this mean? It means a completely different taxing structure. C-Corporations must file and pay taxes with the IRS, separately from he income/salary/bonuses of the owners and employees. The first $50,000 of taxable corporate income is federally taxed at a rate of 15%, and the next $25,000 is taxed at 25%.

S-Corporations do not face the same taxing burden. Because the profits pass through to the shareholders, the business does not have to file taxes in the traditional way. They simply need to file a form 1120S, which is similar to the filing required for a C-corporation, but it is only an informative document; no corporate income taxes are paid to the IRS for the S-corporation. The owners pay personal income taxes as follows: Compensation (in the form of salaries, bonuses, etc.) is treated as ordinary personal income for federal taxation purposes and are subject to payroll taxes, whereas after compensation corporate net income is distributed to the shareholders in proportion to their share of company ownership and is treated as a non-qualified dividend (i.e. Such income is taxed at the personal income tax rate, but is not subject to payroll or self-employment taxes).

Both corporations are controlled by shareholders – each “share” is actually a tiny stake in the company (i.e.: a common share of stock.) These shareholders have a limited personal liability, meaning they cannot lose more than they invest. It also means that their company will always exist, unless they choose to close it (and assuming that any reporting and tax requirements are met and kept current, and the corporation otherwise stays compliant with the law).

While there are generally no citizenship or residency requirements to be a shareholder of a C-Corporation, this is not the case for an S-Corporation. United States citizens and resident aliens are generally free to own shares, non-resident aliens are barred from ownership in an S-Corporation.

While an S-Corporation can be perceived to have a better personal financial impact, they are subject to restraints that do not bind C-Corporations.

S-Corporations may not:

* Exceed 100 shareholders.
* Have shareholders who are non-resident aliens.
* Have more than one class of stock.

Have shareholders that are other corporate entities; S-Corporation shareholders must be natural persons.

C-Corporations are not subject to these restraints, giving them more room to grow and expand.

Both S and C-Corporations offer positives and negatives. While S-Corporations may have better circumstances with which to profit the principals (in most cases), C-Corporations have more flexibility, allowing them to expand beyond the scope of most S-Corporations.

And while Limited Liability Companies are a newer entity type than C-Corporations, they offer unique differences that the C-Corporation cannot provide (and vice versa), and in recent years have often become the entity type of choice for newer and smaller businesses.

One of the primary differences between the two is from the taxing standpoint. C-Corporations are subject to corporate income taxes that are completely separate from their owner(s). Because of this, C-corporations have a greater and more complex tax reporting responsibility than most companies.

This differs from an LLC, which passes profits through to the owner(s), who are then subject to only personal income tax (i.e. The LLC does not pay federal income taxes to the IRS, unlike a C-corporation). This helps avoid double taxation, which C-corporations may have to face if they pay dividends to their shareholders (the corporate income is taxed, and then, if the net income that is left after taxes is distributed to the shareholders, it is then taxed at the personal level at the prevailing dividend tax rate.

While this may seem like an advantage for an LLC, that is not always the case. Because of the Pass through” of profits, LLC owners must pay self employment taxes on profits in addition to their personal income taxes.

A second major difference between LLCs and C-Corporations is that of the ownership structure.

C-Corporations have sort of a hierarchal structure. Power is divided between stockholders, who then hire/appoint directors that make the overall decisions for the corporation, who in turn hire/appoint officers to run the day to day operations of the company. Stockholders with more shares are rewarded with more voting influence and profits.

While this is a standard for most C-corporations, it is not the case with an LLC.

LLCs are structured essentially like a partnership (or a sole proprietorship in the case of a single member/married couple LLC), but with the limited liability protection, similar to a corporation. Members (the generic term used for the owners of an LLC) run the company and make all decisions. The division of ownership, as well as the distribution of the profits (which may be the same or different from the distribution of ownership) as well as most other matters are decided by private agreement amongst the owners.

With an LLC, the owners make the rules in regards to profit distribution and power. A 5% shareholder could reap larger profits if the other owners deem it fair. Thus, and this is in general terms, LLCs are typically a better choice for smaller companies where only a few principals and workers are involved.

Also, an LLC doesn’t need multiple owners to exist; only one member is required in order to have an LLC by all states.

LLCs are also not required to hold corporate and shareholder meetings, which are a requirement for C and S Corporations.

They both have their distinct uses. In general terms, a C-Corporation may be a better choice for a larger entity with more shareholders, and it is also the best choice if there are plans to of equity ownership to a larger number of owners, whether in terms of private placement or taking the company public and having it listed on a stock exchange.

However, this also means a tiny C-corporation stockholder who contributes beyond his or her percentage of ownership will not be rewarded anything beyond what he or she would have normally received (unless the shareholder is compensated with salary or bonuses).

Small business owners are especially at risk of stumbling into this particular pitfall. Since they are often overwhelmed with the multiple facets of their business’ day-to-day operating needs, they may not know how to avoid noncompliance and the resulting crippling or fatal business consequences. IncFile.com can help.

Corporations and LLCs have both internal and external ongoing requirements. The internal requirements must be met by the directors of the corporation or the members of the LLC, and then documented in company records. External requirements are those imposed by the state in which the LLC or corporation was formed; these often include, at a minimum, an annual (every year) or biennial (every two years) filing with the state, as well as some kind of fee.

Internal Requirements

Internal requirements are frequently overlooked, but are vitally necessary to effective decision-making and communication within the organization. A corporation has more internal requirements than an LLC; these include holding and properly documenting director and shareholder meetings, adopting and updating bylaws, issuing stock to shareholders, and recording stock transfers. While these actions are not specifically required for an LLC, it’s still a good idea to adopt an operating agreement (and keep it up to date with amendments as needed), issue membership shares, record interest transfers, and hold annual meetings.

Owners use a consolidated corporate records book to organize and maintain important corporate documents such as articles, bylaws, meeting minutes, resolutions, stock certificates, deeds, and so on. Many business owners use a Corporate Kit or LLC Kit for organizing and maintaining these vital records. Many businesses also use a metal or rubber corporate seal—the kind that leaves the company name in raised letters on a document—to signify that the document is an authorized, official transaction of the corporation. These can be obtained as part of a corporate kit or from a stationery store.

Bylaws lay out the corporation’s basic operating principles; they should be planned for and drawn up as part of the incorporation process. It is not required to file the bylaws with any government agency, but a corporation is required to have at least an initial and annual meetings, adopt bylaws, and keep minutes of the meetings, and keep these on file with the corporate records. Bylaws are important because they set down formal rules for such things as: when and how meetings can be held; notice, quorum, and voting rules for meetings; how decisions can be reached and recorded outside of meetings; basic titles and responsibilities of corporate officers; and the requirements for providing periodic (usually at least annual) information to shareholders.

In short, bylaws are the corporation’s major decision-making and operating procedures set down on paper. This can help owners refine and improve their common practices, and can also serve as a “referee” when uncertainty or disagreements arise on what the official solution is to a given situation or need. Bylaws also give your firm credibility in the eyes of shareholders, creditors, potential investors, other businesses, and even the IRS. Owners should take care, though, to make sure their bylaws do not conflict with their state’s Business Corporation Act or its equivalent.

If the board of directors is not already appointed in the articles of incorporation—a requirement in some states—the initial board’s names and addresses will need to be listed in a separate document. These directors will serve on the board until the first annual shareholders’ meeting, when a new board will be elected.

One of the new corporation’s most important tasks is to prepare minutes for the first board of directors meeting. This first meeting is where several key company actions should be approved, such as electing officers, adopting bylaws, selecting the main office or headquarters location, choosing a bank for corporate accounts, the accounting period or fiscal year, initial tax elections, and issuance of initial shares of corporate stock. Normally the groundwork and supporting research is done before the actual meeting, although the board can change or amend the minutes as prepared if they vote to do so. Any of the initial directors can prepare the minutes, but the entire board must sign them at the meeting, incorporating any amendments or changes as needed.

Thereafter, at a minimum, the corporation must hold a shareholders’ meeting and a board of directors meeting at least annually; accurate, complete minutes for both are essential, because these documents will be used as reference materials for future decisions. Remember: “If it’s not written down, it didn’t happen.”

A limited liability company, on the other hand, comes officially into being when its articles of organization are filed with the state’s LLC office. The articles contain basic organizational information about the LLC, such as its name; whether it’s managed by its members or by selected members called managers; the name and address of its members; and where its office is.

Next to its articles of organization, the most important document for an LLC is its operating agreement. This isn’t required by the state (except for New York)—but it’s a key internal document that officially records how the LLC will run. It is very much the same as a partnership agreement; except for an LLC it is called an operating agreement. It lists the members, how much each member has invested, how profits will be divided, and how much weight each member has when matters come to a vote. It may also specify requirements for meetings (notice, quorum, voting rules, etc.) and the like, but it doesn’t have to. Normally, however, the operating agreement does include state-mandated requirements.

External Requirements

External requirements usually consist of a periodic report to the state and some kind of fee. Most states require corporations and LLCs to file an annual or biennial statement or report, along with an associated filing fee of some kind. LLCs may also be liable for payroll tax, property taxes, sales and use taxes or “seller’s permits,” or business license renewals. Other state or local filings, such as business licensing or state or municipal tax registrations, may also be required. Owners will also still file their individual state and federal income tax returns.

Some states also impose a franchise tax—basically a fee paid by the company for the state’s permission to operate there. Different states use different methods to calculate the franchise tax; it may be based on revenue, or on some measure such as a corporation’s total number of authorized shares and their value.

Each state has its own deadlines for annual statements and franchise taxes. Some states determine these based on the formation anniversary of the corporation or LLC. Other states set one deadline for annual statements for all corporations and another for all LLCs. Business owners need to know how and where to research these requirements so that they can plan for them before incorporating, and then keep up with changing requirements as their business continues to operate and progress.

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