Who Has Control in an S Corporation?
An S corporation allows pass-through taxation, meaning that it pays no taxes on the corporate level, leaving taxation to the shareholders. While C corporations often have many thousands of shareholders, S corporations can have no more than 100 shareholders, and the organizational technicalities are somewhat different.
Unlike a sole proprietorship, partnership or limited liability company, a corporation is owned by shareholders who have stock in the company. This ownership of stock makes ownership of the company easily transferable. However, having so many individuals owning one company can make things difficult if they all try to make operational decisions. For this reason, both C and S corporations have boards of directors whom the shareholders elect by vote. The directors make major operational decisions and hire corporate officers.
Corporations do not have a single method to elect directors: the exact methodology is something that the company can decide. However, director elections typically fall under two categories: slate elections and individual elections. In a slate election, an entire board runs together as a unit, and the shareholders can vote for or against that group of directors. In an individual election, shareholders vote on each specific board candidate according to her own merits.
Corporate officers are employees who the board of directors hire to oversee the daily operations of the company. Most larger corporations have a chief executive officer, chief operating officer and chief financial officer. The chief executive officer (CEO) only has to answer to the board of directors, and he has the power to make legal decisions on behalf of the company. The chief operational officer (COO) oversees most of the corporation's daily affairs, while the chief financial officer (CFO) handles the corporation's finances. The COO and CFO both typically answer to the CEO.
Though the hiring of corporate officers is common, it is not absolutely necessary. Many smaller corporations—especially S corporations—rely on shareholders to operate in these capacities.
Though the general structural rules of S corporations and C corporations are the same, they do have some differences. In addition to the difference in the amount of shareholders they can have, they pay their taxes differently: while S corporations enjoy pass-through taxation, C corporations must pay income tax on the corporate level as well as the individual level. Though both C corporations and S corporations can have single owners, it is much more common to see single-owner S corporations because of the benefits of pass-through taxation.