Page 121 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Entrepreneurship and Small Business Management

Notes of the corporation, after it has been given the authority to conduct business by the state. The
bylaws of the corporation outline the actual mechanics of the operation and management of the
corporation. There are two basic types of corporations: C-corporations and S-corporations.
These prefixes refer to the particular chapter in the U.S. Tax Code that specifies the taxcon
sequences of either type of corporate organization. In general, both of these two types of
corporations are organized and operated in similar fashion.
There are specific rules that apply to the ability to be recognized by the U.S. Internal Revenue
Service as an S-corporation. In addition, there are significant differences in the tax treatment of
these two types of corporations. These differences will be clarified below. The basic structure
and organizational rules below apply to both types of corporations, unless noted.
C-Corporation: In its simplest form, the corporate organizational structure consists of the
following levels:

1. Shareholders: who own shares of the business but do not contribute to the direct
management of the corporation, other than by electing the directors of the corporation
and voting on major corporate issues.

2. Directors: who may be shareholders, but as directors do not own any of the business. They
are responsible, jointly as members of the board of directors of the corporation, for making
the major business decisions of the corporation, including appointing the officers of the
corporation.
3. Officers: who may be shareholders and/or directors, but, as officers, do not own any of the
business. Officers (generally the president, vice president, secretary, and treasurer) are
responsible for day-to-day operation of the corporate business.
S-Corporation: The S-corporation is a certain type of corporation that is available for specific
tax purposes. It is a creation of the Internal Revenue Service. S-corporation status is not relevant
to state corporation laws. Its purpose is to allow small corporations to choose to be taxed, at the
Federal level, like a partnership, but also to enjoy many of the benefits of a corporation. It is, in
many respects, similar to a limited liability company. The main difference lies in the rules that
a company needs to meet in order to qualify as an S-corporation under Federal law. In general,
to qualify as an S-corporation under current IRS rules, a corporation must meet certain
requirements:
It must not have more than 75 shareholders
All of the shareholders must, generally, be individuals and U.S. citizens

It must only have one class of stock
Shareholders must consent to S-corporation status
An election of S-corporation status must be filed with the IRS
The S-corporation retains all of the advantages and disadvantages of the traditional corporation
except in the area of taxation. For tax purposes, S-corporation shareholders are treated similarly
to partners in a partnership. The income, losses, and deductions generated by an S-corporation
are passed through the corporate entity to the individual shareholders. Thus, there is no double
taxation of an S-corporation. In addition, unlike a standard corporation, shareholders of
S-corporations can personally deduct any corporate losses.

Advantages

Following are the various advantages of corporation form of business:

1. One of the most important advantages to the corporate form of business structure is the
potential limited liability of the founders of and investors in the corporation. The liability

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