In addition, annual meetings of directors and shareholders must be held with written minutes reflecting important transactions or decisions. Corporations must file federal and state tax returns. While the corporation is fully liable for all its business obligations, individual shareholders are liable only to the extent of their investment. While the corporation offers shareholders some protection from liability claims, it is not a substitute for a comprehensive business and personal liability insurance program. For income tax purposes, business owners must choose whether the corporation is a C or an S corporation.
C corporations pay taxes on income.
Shareholders do not report any portion of corporate income or losses on their individual returns, but when income is passed on to the shareholders as salary or dividends, it is taxable income for them. A corporation with 75 or fewer employees may make a special election to be taxed as an S corporation. An S election must be filed with the IRS on or before the 15th day of the third month of the first taxable year. An S corporation is eligible for a wide variety of retirement plans and benefit plans. Shareholders who own two percent or less of stock also are entitled to the fringe benefits available to C corporation employees.