1. Arizona S Corporation
2. Structure and Governance
3. S and C Corporation Tax Differences
4. Treatment of S Corporations

Arizona S Corporation

An Arizona S Corporation has certain requirements, as an S Corporation operates differently than a C Corporation. Specifically, an S Corporation is one that is separate and distinct from the corporation’s owners, also referred to as the stockholders. The purpose of creating an Arizona S Corporation would be to limit liability and pass-through taxation of the business profits.

Structure and Governance

When you form a corporation in Arizona, it automatically operates as a C Corp. It isn’t until after the corporation is formed that the business’s shareholders can elect special tax status with the Internal Revenue Service (IRS) to become an S Corporation. The corporation can choose to operate as an S Corporation either immediately after forming or years down the line.  

Once you file the required documentation with the IRS to operate as an S Corporation for tax purposes, a majority of states will also view the corporation as an S Corp. If you choose to begin operating as a C Corp, you can file an application request on the IRS website, but the business must use the S Corp’s fiscal year end (December 31). Additionally, the corporation cannot later switch back to the S Corporation status for a minimum of 5 years.

Shareholders of Arizona S Corporations have limited liability to the debts and obligation incurred by the business, along with limited liability regarding legal actions brought against the company. Therefore, no one can go after shareholders personal assets, whether it is a home, car, bank account, or other tangible/intangible assets. S Corporation shareholders are only liable for the amount of capital they invested into the corporation.

Exceptions to the limited liability rule do exist, including when a corporation has recklessly harmed people or engaged in fraudulent activities.

S Corporations can obtain capital much quicker and more easily than some other types of business structures since corporations can issue and sell stock, along with a variety of other financial products.

S and C Corporation Tax Differences

• A C Corporation is taxed as a distinct entity. Therefore, the business is required to report both profits and losses on its corporate tax return.

• C Corporations pay corporate taxes on profits, while shareholders aren’t taxed on the corporation’s profits.

• C Corporation shareholders must report and pay income tax on the money they earn from the corporation.

• If a C Corporation wishes to pass the additional profits of the company to its shareholders, then the business would do this through dividends. These dividends would be reported as income on the shareholder's personal tax returns. Therefore, there is double taxation as the corporation is taxed on the profits and the shareholders are taxed on the additional profits that pass-through to them through dividends. An S Corp, however, does not operate in this way.

• An S Corp doesn’t pay income taxes. Rather, the profits of the business pass-through entirely to the shareholders (owners) of the business, and those owners will pay income taxes on their share of the profits.

• Unlike C Corporation shareholders, S Corporation shareholders can balance other types of income by including their own share of the businesses losses on their personal tax returns. However, they can’t reduce their taxes by accounting for corporate losses that are greater than their ‘stock basis,’ which is the amount of money they invested into the business in the first place.

• Only up to 25 percent of an S Corporation’s gross income can come from passive income.

Treatment of S Corporations

While most states view and treat S Corps identical to the way in which the federal government views them, some states have different laws. In fact, some states don’t recognize such business structures. If this is the case, the S Corporation can still exist in that state. The only issue would be that it is treated as an S Corp only by the federal government whereas the state would recognize it as a C Corp.

Some states tax both the S Corp’s profits and the shareholder’s shares of the corporation’s profits. If this is the case, the business is essentially double-taxed in the way a C Corp is. Some states tax S Corps on portions of the income even though they do in fact recognize this type of business structure. Arkansas, New Jersey, New York, Ohio, and Wisconsin require that the S Corp file at the state level in addition to the IRS federal tax filing.

If you need help learning more about operating an S Corporation in Arizona, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.