What is an S Corporation?
An S corporation (S corp) is a unique type of corporation which is done through an IRS tax election. Also, an eligible domestic corporation can avoid double taxation by electing to be an S corporation.
An S corp is a corporation with the Subchapter S designation from the IRS. What makes the S corp different from a traditional corporation (C corp) is that profits and losses can pass through to your personal tax return.
Consequently, the business does not receive tax itself. Also, only the shareholders are taxed. However: any shareholder who works for the company must pay him or herself “reasonable compensation”. Basically, the shareholder must receive compensation fair market value, or the IRS might reclassify any additional corporate earnings as “wages.”
Some S Corporation Advantages:
- Limited liability. Company directors, officers, shareholders, and employees enjoy limited liability protection.
- Pass-through taxation. Owners report their share of profit and loss on their individual tax returns.
- Elimination of double taxation of income. Income is not taxed twice – once as corporate income and again as dividend income.
- Investment opportunities. The company can attract investors through the sale of shares of stock.
- Perpetual existence. The business continues to exist even if the owner leaves or dies.
- Once-a-year tax filing requirement. Versus c corps, which must file quarterly.
To qualify for S corporation status, the corporation must:
- Be a domestic corporation
- Have no more than one hundred shareholders
- None of whom are nonresident aliens or corporations
- All of whom consent to the election
- Have only one class of stock
- Not be a member of an affiliated group (only individuals, estates, and certain exempt organizations and trusts qualify)