This description is general, and will vary based on state law. Throughout this section, “owners” also means shareholder or stockholder.
There are two different types of corporations:
C Corporation
A C corporation is a separate taxpaying entity. The profits of a C corporation are subject to double taxation when dividends are paid; the profits are first taxed to the corporation, and then taxed to the individual shareholders when they are distributed as corporate dividends.
C corporations are required to file annual tax returns on IRS Form 1120, U.S. Corporation Income Tax Return. Shareholders are issued IRS Form 1099-MISC, Miscellaneous Income, to report dividend distributions.
Under the corporate structure, the business entity of a C corporation is legally separate from that of its owners. This separation protects owners from personal exposure to the corporation’s debts and obligations. A C corporation allows its owners to raise larger amounts of investment capital by offering investment through private equity or a public stock offering. Being able to sell stock to investors expands the possible number of shareholders. As a business concern and separate legal entity from its owners, a C corporation can have a perpetual life.
Documentation
Documentation for a C corporation includes:
- Articles of incorporation
- Bylaws
- Corporate borrowing resolution
- Stock record
- Minutes of meeting
- Certificate of good standing
More than one individual may be required to execute agreements on behalf of a C corporation. The signature block, individuals’ names, and titles should be styled consistent with the corporate borrowing resolution.
Because the shareholders are not directly liable, a separate guarantee agreement is necessary to acquire the individual’s personal liability for the debt to the borrower.
S Corporation
An S corporation structure is legally limited to a maximum of 100 shareholders and one class of stock, making it a common choice for small businesses. Similar to a C corporation, an S corporation is legally separate from that of its owners. This separation protects owners from personal liability to the corporation’s debts and obligations
This corporation type is similar to a partnership, in that net profit or loss flows through to the owners and is reported on their individual tax returns. As with a partnership, the income, deductions, and tax credits of an S corporation flow through to shareholders annually, regardless of whether distributions are made.
S corporations are required to file annual tax returns on IRS Form 1120S, U.S. Corporation Income Tax Return. Each owner receives an IRS Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc. that reports their share of the net profit or loss generated by the business as well any other activity that has a tax consequence. Each partner transfers the information on the Schedule K-1 form to their personal tax return and is taxed at their respective personal rate.
The Schedule K-1 will also report any distributions from the entity to the owner or capital contributions from the owner to the entity. Distributions are cash outflows from the entity to the owners. Contributions are usually cash flows from the owner to the entity.
As a separate legal entity, an S corporation can have a perpetual life.
Documentation
Documentation for an S corporation includes:
- Articles of incorporation
- Bylaws
- Corporate borrowing resolution
- Stock record
- Minutes of meeting
- Certificate of good standing
More than one individual may be required to execute agreements on behalf of an S corporation. The signature block, individuals’ names, and titles should be styled consistent with the corporate borrowing resolution.
Because the shareholders are not directly liable, a separate guarantee agreement is necessary to acquire the individual’s personal liability for the debt to the borrower.
Last updated November 25, 2016
