What is the difference between a C corporation and an S corporation?

Both S and C corporations are formed the same way - by the filing of Articles of Incorporation with the Secretary of State's office. As a legal matter, the S corporation is identical in many ways to the C corporation because both limit the shareholders' personal liability. But as a tax matter, the S corporation offers the advantage of avoiding taxation at the corporate level. In order to obtain S status, a company files Form 2553 to "elect" to be treated as an S corporation. If accepted by the IRS, the company is then taxed like a partnership. The corporation is not taxed, but the income flows through to shareholders who report the income on their individual returns.

Note that the 2553 is a tax election only; and enables the shareholder to treat the earnings and profits as distributions, and have then pass thru directly to their personal tax return. The catch here is that the shareholder, if working for the company, and if their is a profit, must pay herself wages, and it must meet standards of "reasonable compensation." This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profits as wages, and you will liable for all of the payroll taxes on the total amount.

Answer provided by Chuck Roach - Roach Law Office