Travis: How is an S Corp different than a C Corp, and what do those mean?
Jake: Well, S Corp and C Corp are really designations of how a corporation is taxed. So it's not really, I think some people make a distinction saying it's an “S Corporation†it's a “C Corporationâ€. It's really a tax distinction that the IRS places on it. The simplest way to say it is that an S Corporation is a pass through entity. Meaning that the profits and income of the corporation is passed through to the individual shareholders. Whereas with a C Corporation there's double taxation. Meaning you're taxed at the corporate level as well as the personal level for dividends that you receive. As well as salaries.
That's the big difference. Now, there's also some requirements that an S Corporation has that a C Corp does not have.
An S Corporation cannot have more than 100 shareholders. An S Corporation cannot have preferred stock. And an S Corporation cannot have over 25% of it's income come from passive sources. Such as, rentals. So that's why you see a big shift toward LLC's for rental properties.
Travis: Right.
Jake: One other restriction that an S Corporation has is residency requirements. To be an S Corporation you have to be a permanent resident, or you have to be a citizen.
Travis: A permanent resident or a citizen.
Jake: Right.
Travis: Now, does that mean any part of ownership inside of an S Corporation or just a majority owner?
Jake: It's any part of the S Corporation.