S Corporation Basic Definition
Corporations are a legal business form created under the state statutes and each state has variances in laws governing the formation, operation and dissolution of corporations. In the ‘eyes’ of the law the corporation is an independent legal entity that has legal and statutory obligations distinct from its share holders. A corporation can sue and be sued under the statutes. The share holders of the corporation will not be a party in such a lawsuit. This distinct entity status gives the corporation a perpetual life to its business, disability or demise of share holder(s) does not affect the longevity of the corporation.
Corporations can be a C Corporation or an S Corporation. The basic operational structures of both are same under the statutes. One difference is in the ownership of stocks or shares. Stocks or shares in an S Corporation can be owned by only by natural American citizens and the maximum number of share holders is limited to 100. There are no such ownership restrictions in the C Corporation. Another corporation, a firm or an alien can own stocks in a C Corporation and there are no limits to the number or share holders. Corporate taxation is what differentiates a C Corp and an S Corp. C Corporations are subject to corporate taxes meaning it has to file an individual tax return and pay the tax on its business profits or income. The S Corp has a pass through taxation. The share holders can report the profits on a prorated basis and pay tax through their personal tax returns.
Limited Liability Company or LLC form of legal business structure also has the advantage of limited personal liability as that in a corporation and the pass through taxation benefit similar to the S Corporation. The notable difference in LLC Vs S Corp is that LLC is not subjected to the formal procedures required in the operation of an S Corp.
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