Generally speaking, once a corporation is formed it is classified as either a C Corporation (C Corp) or an S Corporation (S Corp). This classification occurs at both a federal level (through the Internal Revenue Service) and at a state level, although the state will usually following whatever classification is granted by the IRS.
When incorporating your business, all corporations are defined as a C Corp by the IRS. After incorporation is complete, the new corporation must affirmatively elect to become an S Corp. This election occurs by filing paperwork with the IRS, and as stated above, once this is done your state government will usually apply the same classification.
The main difference between a C Corp and an S Corp is the issue of taxes. A C Corp is taxed an individual entity with profits and losses. Then the C Corp grants a payment to its shareholders who are taxed as well as individuals. Many refer to this as a “double tax.” On the other hand, an S Corp does not pay taxes as a corporation, but instead the individual shareholders pay taxes when they receive a distribution.
For more information to help determine if your new business should be an S Corp or a C Corp, contact our San Francisco Bay Area Corporation Attorneys for a free consulation at the law offices of Jones & Devoy LLP.