A corporation is a limited liability legal entity in which the owners (called shareholders) are not liable for the corporation’s debts and obligations. Shareholders typically choose the corporate form because of its shield against personal liability.
The two significant distinctions between an "S" and "C" Corp are: (1) an "S" Corporation is a pass-through tax entity (the profit or loss of the business is reflected on the personal income tax return of the owners) whereas in a "C" Corporation is a separate legal tax entity which can lead to double taxation. (2) The ownership of an "S" Corporation is restricted; however, the "C" Corporation does not possess these same restrictions such as number of shareholders, residency of shareholders, ownership and transferability of shares.
Close Corporation
A Close Corporation, also known as a Statutory Corporation, is a corporation with 35 or less shareholders. A close corporation permits the shareholders to enter into an agreement, in writing, to relax various corporate requirements. Close Corporations are easy to form and operate. Through the effective use of a shareholders' agreement, shareholders may design their own corporate governance, including a waiver of mandatory meetings of the board of directors and shareholders. Typical close corporations stress on informal procedures and restrictions on share transfer. A Close Corporation may be taxed as a C or S Corporation.
S Corporation
The shareholders of a corporation may elect for the corporation to be taxed as a “S Corporation.” The following requirement must be met in order to elect t be treated as an S Corporation:
- Only One Class of Stock
- Maximum of 100 Shareholders (In California Husband and Wife are treated as a Single Shareholder)
- Shareholders Must be United States Citizens or Residents
- Profit and Losses Must Be Allocated to Shareholders in Proportion to their Ownership Interest.
- Election Must Be Made by the fifteenth day of the third month of the tax year for which the election is intended to be effective (relief for late elections may be available if the corporation can show that the failure to file on time was due to reasonable cause)
Formation
A corporation is created by filing articles of incorporation with the Secretary of State. Thereafter, bylaws must be adopted, setting forth the corporate bylaws or rules of the corporation. The articles at a minimum must contain the following:
- Name of the Corporation
- Statement of the Purpose of the Corporation
- Name and Address of the Agent for Service of Process
- Class and Total Number of Shares
- Signature of Incorporators or Directors
The Articles of Incorporation of a Close Corporation also require a statements indicating that the corporation is a close corporation and that the number of shareholders does not exceed 35
Limited Liability of a Corporation
Corporations provide limited liability protection to the shareholders. As mentioned above, the shareholders are not personally liability for corporate debts and obligations. In order to maintain limited liability, the LLC must be correctly established and maintained by the owners.
Management and Control
Typically the shareholders have the right to elect directors, then the directors elect the officers and the officers exercise overall control over the management of the corporation. The officers conduct the day to day business of the corporation.
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