C-corporations exhibit the normal qualities associated with corporations, possessing status as legal persons, providing their shareholders with limited legal liabilities and being taxed on their income before distributing their earnings to those same shareholders. S-corporations are a class of corporations that share in their legal status and protections, but are not taxed on their income. In return, S-corporations must meet certain requirements in their ownership and other matters to file as such.
Other than sole proprietorships and partnerships, corporations are perhaps the most common class of business extant. Corporations are accorded status as legal persons, thus according some of the same rights as natural persons or human beings, in particular the right to create contracts. It is this legal status that ensures that corporate shareholders cannot be held liable for the corporation's legal liabilities and in return, the corporation must file tax returns as a legal person and be taxed on its income.
C-corporations experience what is called double income taxation. The C-corporation is taxed on its income when it files its return.The income that is distributed to the corporation's shareholders is taxed once again as capital gains, hence the term "double income taxation." In contrast to C-corporations, S-corporations are not taxed on their income, instead passing it onto their shareholders to be taxed once and only once.
Stricter restrictions exist on what businesses can be classified as S-corporations than for C-corporations. First, S-corporations must be domestic to the United States. Second, entire categories of corporations are disqualified from filing as S-corporations, including but not limited to insurance companies and certain other financial institutions.
Ownership is one area where S-corporations differ greatly from C-corporations. Although both are owned by shareholders who purchase shares of their stock, S-corporations have restrictions that greatly curtail the number and the identities of their shareholders. S-corporations must have no more than 100 shareholders who own one single class of shares. Said shareholders must be natural persons who are either residents in the United States or U.S. citizens.