An S corporation (also known as a small business corporation or Subchapter S corporation) is a type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. Like a C corporation, an S corporation is a legal entity that is separate and distinct from its owners, and it is owned by shareholders who elect a board of directors to oversee the management of the company. The main difference between a C corporation and an S corporation is the way in which they are taxed.
An S corporation is a pass-through tax entity, meaning that the corporation itself is not taxed on its profits. Instead, the profits of the S corporation are passed through to the shareholders and taxed at the individual level. This is similar to the way that a sole proprietorship or partnership is taxed.
One of the main advantages of an S corporation is that it offers the liability protection of a corporation while avoiding the double taxation that occurs with a C corporation. Another advantage is that S corporations may be eligible for certain tax benefits, such as the ability to deduct certain business expenses and the potential for tax-free contributions to employee benefits plans.
However, there are some limitations on who can be a shareholder in an S corporation, and there are strict rules regarding the number and type of shareholders that an S corporation can have. Additionally, S corporations are subject to more complex regulations and reporting requirements than other business structures, such as sole proprietorships and partnerships. It’s important to consider the specific needs and goals of your business when deciding whether an S corporation is the right choice.