What Is a Corporation?
A corporation is created under state law. It is a separate legal entity, separate and apart from its owners (called shareholders). This applies to both C and S corporations. The C and S simply refer to the Internal Revenue Code (IRC) sections governing their tax treatment.
A C corporation is not a pass-through entity. An S corporation is. A C corporation reports its profits and losses on Form 1120 and pays its own taxes.
C corporation profits may be distributed as dividends to its shareholders. If profits are not distributed, they are credited to Retained Earnings which is reported in the stockholders' equity section of the corporation's balance sheet.
An S corporation is a pass-through entity. This means, all income, deductions, gains, losses, and credits pass through the company to its shareholders.
Keep in mind, all corporations start their corporate existence as a C corporation. After the initial incorporation, shareholders may apply to the IRS for S corporation tax treatment by filing Form 2553.
Schedule K-1 and Schedule E:
S corporation shareholders receive Schedule K-1 annually which shows their share of the S corporation's income, deductions, gains, losses, and credits. Based on each shareholder's Schedule K-1, the shareholder reports his share of these items on Schedule E. Part II, which is attached to Form 1040.
An S corporation files Form 1120S, U.S. Income Tax Return for an S Corporation
Ten Legal Attributes of a Corporation
Although C and S corporations are treated differently for tax purposes, legally, they are treated the same. Changing from C status to S status is simply a tax election made with the IRS on Form 2553 and has nothing to do with the legal status of the corporation.
The following legal attributes apply to a corporation (C or S corporation):
- It is a separate legal entity, separate and apart from its owner(s) (shareholder(s)). In a widely quoted definition, Chief Justice John Marshall in 1819 described a corporation as "an artificial being, invisible, intangible, and existing only in the contemplation of the law.
- It provides shareholders limited liability from corporate debts. This is one of the most important reasons for incorporating.
- It is formed under state or federal law or the laws of other countries. A corporate charter is obtained from one of the fifty states.
- Shares of stock may be transferred freely provided there are no restrictions.
- It has continuity of life. If a shareholder dies or sells his shares, the corporation continues doing business as usual.
- It can buy, sell, and own property in its own name.
- It can enter into contracts with others.
- It can sue and be sued in its own name.
- It can be a partner in another business.
- Its name is signed by corporate seal.
Tax Identification Numbers For a Corporation
Employer Identification Number (EIN):
A corporation must have an EIN. The IRS issues it. The number is used to identify the corporation on tax documents.
State Withholding Number:
For state purposes, the corporation will need a state withholding number. Some states, such as Nevada, don't have a personal income tax. Check your state.
State Account Number:
This is for state unemployment tax (SUTA) reporting. Generally, states, such as Arizona, assign each employer an account number.
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- Return to the Tax Basics for Startups Table of Contents to find related links.