What is the difference between a "C" and an "S" corporation?
All corporations start life as “C” corporations. As a benefit to small businesses which meet certain criteria, the Internal Revenue Service allows them to apply (via fapply-now-simpleorm 2553) for “S” status. This means that the corporation will be taxed simi-larly to a partnership, with each shareholder reporting the profit or loss of the corporation on his personal tax return, in proportion to the percentage of shares he holds. This means that if there is a loss the shareholder can use it to offset his other tax obligations. If there is a profit it is taxed once, at the individual’s tax rate, rather than twice (a “C” corporation will pay a tax on profits and individual shareholders will be taxed again when those profits are distributed as dividends.)
Are there any drawbacks to being an "S" corporation?
The main negatives are the restrictions. There can be no more than 65 shareholders; non-resident non-US citizens may not be shareholders; and the tax year is somewhat inflexible (it usually must end on December 31.) Additionally, an “S” corporation cannot be owned by another corporation.
What is the difference between an "S" corporation and a Limited Liability Company?
In terms of reporting income, they are quite similar. The LLC is somewhat less restrictive than the “S” corporation. There can be any number of members and there are few restrictions on who those members may be. On the less positive side, unlike the laws pertaining to corporations which are pretty uniform from state to state, LLC laws may vary greatly by state. They are also a relatively new entity, so there is not as great a definitive body of tax rulings on them as there is with corporations.
