Corporation Classifications

Once a entity becomes a corporation, it is automatically classified as a C-Corp. This permits the IRS to tax the entity's earns twice: once at the entity ;level and once again when a shareholder receives a dividend. To avoid double taxation, many corporations elect to be treated as an S Corporation.

The Subchapter S Revision Act of 1982 was passed to permit the incorporation and operation of certain small businesses without income taxation at both the corporate and shareholder level.

Most important requirements:

• The corporation must be a domestic corporation.
• The corporation must not be a member of an affiliated group of corporations.
• The shareholders of the corporation must be individuals, estates, or certain trusts. Corporations, partnerships, and nonqualifying trusts cannot be shareholders.
• The corporation must have seventy-five or fewer shareholders.
• The corporation must have only one class of stock, although not all shareholders need have the same rating rights.
• No shareholder of the corporation may be nonresident alien.

• S-corporations are often referred to as a hybrid of the regular corporation (c-corporation) and a partnership.
• The shareholders are taxed directly, like a partnership, so that the corporate income is taxed one time only.
• Whereas in a c-corporation, income can be taxed twice. Avoiding this double taxation is frequently the reason parties decide to become an S-corporation.
• Shareholders of an S-corporation still have the protection of the limited liability associated with regular corporations

• Fringe benefits paid by the corporation to employee-shareholder who own more than 2% of the stock may not be deductible.
• All S-corporations must end their tax year on December 31 unless the Internal Revenue Service permits otherwise.

Professional Corporations

Corporation formed by professionals (e.g., doctors, lawyers) to obtain the benefits of incorporation (such as tax benefits and limited liability). In most situations, the professional corporation is treated like other corporations, but sometimes the courts will disregard the corporate form and treat the shareholders like partners.

A public corporation is one formed by government (e.g., cities, towns, and public projects). A private corporation is one formed wholly or in part for private benefit. Most corporations are private corporations.

Corporations formed without a profit-making purpose (e. g., charitable, educational, and religious organization and hospitals).