Welcome to Founders University, our core curriculum designed to provide start-up company founders with the basics they’ll need to get their company off the ground.
For our first session of Founders University, we share an overview of incorporating provided by partner Dave Cappillo. In this course, Dave highlights the basic differences between a C corporation and an S corporation.
Sharpen your pencils, let’s begin!
C Corp vs. S Corp
Corporations are designated for tax purposes either as a C corporation or as an S corporation.
The default rule for tax purposes is that corporations are C corporations. C corporations have no limits on the number of shareholders; there are no residency requirements on the shareholders; and there are no requirements as to whether the shareholder must be an individual, or an entity, or otherwise.
A key characteristic of a C corporation is that there are two levels of tax: 1) the corporation as an entity is taxed (as a taxpayer); and 2) the shareholders are also taxed.
With C corporations there are no limits on the classes of stock – the corporation can have both common and preferred stock. One important note: stock must be paid for by the recipient – either in the form of cash, some property, or services that have rendered. Generally, future services that have not yet been rendered are inadequate in consideration for stock.
The next type of corporation is an S corporation.
To qualify as an S corporation, the founders must file with the IRS what’s called an “S selection”. To qualify as an S corporation, entities must observe the following restrictions:
- They may not have more than 100 shareholders;
- Shareholders of the corporation must be individuals, or certain qualifying trusts;
- All the shareholders must be U.S. citizens or resident aliens; and
- The corporation may have only one class of stock.
That’s it for our first lesson. Thank you for your attention! Look for future sessions of Founders University in the weeks ahead. Class dismissed!