There may also be state forms to file to obtain S corp status for state tax purposes. A C corporation may be converted to an S corporation by filing IRS Form 2553, Election by a Small Business Corporation, with the Internal Revenue Service (IRS). FormationĪll corporations begin as C corporations. While there are similarities between C corporations and S corporations, there are also some stark differences. Although there are some exceptions, a shareholder is not personally liable for corporate debts, and assets of the shareholder are protected from business creditors. As a separate legal entity, only assets of the corporation are subject to corporate debts. A corporation is set up under state law, and is legally a separate entity from the owners. Setting up a corporation provides limited personal liability for its owners. Failure to do these things can result in the loss of personal liability protection and dissolution of the corporation. Profits, called dividends, are distributed to shareholders according the number of shares each owns.Ī corporation is formed by preparing a document called articles of incorporation, and filing registration documents with the state.Ĭorporations are required to issue stock, adopt by-laws, hold annual director and shareholder meetings, keep minutes of meetings, issue written corporate resolutions for significant decisions, and file annual reports with the state government and pay annual fees. The directors hire officers to manage the day-to-day operations. Owners of a corporation are called shareholders, and they elect directors to oversee business operations. Corporation BasicsĬ corporations and S corporations have quite a bit in common. While they have some similarities, they also have some important differences.īefore you make your decision, make sure you understand the pros and cons of each. C corporation and S corporation designations are both valid choices when incorporating a business.
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