So one of the questions we get at initial consultation stage is I want to form a corporation and I don’t know if I should form an S Corporation or a C Corporation. The actual corporation itself, there is no differentiation. You incorporate a corporation and you have a corporate body.
The S or C status is actually a tax based status. C Corporation is traditional status which you get by default, which essentially means whatever profit is leftover at the end of the year for tax purposes is taxed and any distributions or dividends to shareholders is also taxed.
An S Corporation’s status, which allows a corporation to operate essentially like a partnership or a limited liability company where profit or loss is not taxed at the corporate level, rather it passes through to the individual owners or partners. There are some limitations with S Corporations. The shareholders need to be individuals. They need to be US persons. There are some trusts that can be shareholders, but it’s primarily just US people with a green card or a citizenship.
There’s a maximum of a hundred shareholders that are permitted under the S status of a corporation. And anytime when you actually have shareholders who have different financial interests, meaning rights to more money or less money, when we typically see with preferred stock, sort of an a venture capital deal, you can no longer be an S Corporation and you have to be a C Corporation.
