S-Corporation

An S corporation (S corp) is a U.S. corporation that elects to "pass through" its profits, losses, deductions, and credits to its shareholders, who then report them on their personal tax returns, avoiding the double taxation common with C corporations. To qualify, a business must be a domestic corporation, have fewer than 100 eligible shareholders (individuals, trusts, and estates), issue only one class of stock, and not be a financial institution or insurance company. S corp status also provides limited liability protection to shareholders, shielding their personal assets from business debts. 

Pass-Through Taxation: 

An S Corportion is not taxed on the entity level but on the shareholder level. Meaning profits and losses flow to the individual shareholder's tax return and each shareholder pays tax on their share of profits on their personal Tax Return. 

Avoidance of double Taxation:

Unlike a C-Corporation where the Corporation first pays Tax on the Corporate level and then the dividends are again taxed on the Individual Shareholder' return, an S Corporation has an advantage of not being taxed twice which is a significant benefit of forming an S Corporation. 

Liability Protection:

An S corps offer limited liability, meaning shareholders are generally not personally responsible for the business's debts and liabilities. 

Shareholder Limitations:

An S-Corporation can have only a maximum of 100 shareholders. In certain cases, family members can be treated as a single shareholder. Lineal decndents "Children, grandchildren, spouse" can be considered as a single member and therefore would not count towards the maximum number of allowed share holders. A non resident alien cannot be an S-Corporation shareholder. All shareholders must be US residents. An S Corporation must be a domestic entity. 

Stock Limitations:

An S-Corporation can only have one type of stock unlike a C Corporation that can have common or preferred stock.

Restricted Businesses for S Corporation: 

An S Corporation cannot be an insurance company, a financial institution, or a domestic international sales corporation. 

Electing an S Corporation Status: 

An entity filed IRS form 2553 after formation to be elected as an S Corporation. 

Tax Benefit of an S Corporation:

An S Corporation can help owners avoid self-employment taxes by paying a reasonable salary and taking the rest as distributions that is not subject to self employment tax.

S Corp FAQ's:

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