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S Corporation (S Subchapter)

Candlefocus Editor
The S corporation is a type of legal business structure defined by subchapter S of the U.S. tax code. Unlike C-corporations, S corporations are pass-through taxation entities. That means they don’t pay corporate income taxes, and instead their profits and losses are passed through to the shareholders who are taxed on their individual returns. This can result in an overall lower tax burden than if they’d elected to be taxed as a C-corporation.

In order to be eligible for S corp status, the business must have 100 or fewer shareholders, all of whom must be U.S. residents, and must file Form 2553 with the IRS. Additionally, the corporation must be a domestic corporation that only has allowable shareholders, including individuals, certain trusts, estates, and tax-exempt organizations. As with other forms of incorporation, S corps must adhere to certain rules and establish bylaws.

The benefits of an S corporation over a C-corporation include the fact that the corporation’s income is typically taxed at a lower rate. Additionally, members of S corps are limited in their liability for the company’s debts, and can take advantage of stock options or performance-based incentives to attract and retain key employees.

A disadvantage of S corporation status is that maintaining the specified requirements, such as the number of shareholders and their identities, means more paperwork work. Coming into compliance with new IRS regulations also takes up time and money. Specific benefits also vary by state.

One alternate to an S corp is the LLC or limited liability company. LLCs are also pass-through entities, meaning they don’t pay corporate taxes, and they offer their members a degree of limited liability. LLCs are more flexible and don't have the same requirements as S corps. Additionally, LLCs don’t have the same restrictions on ownership.

Choosing an S corp is a decision that should be made carefully, and with thoughtful consideration for the business's goals, needs, and objectives. It is important to discuss this option with a qualified local business attorney or accountant who can help you understand if an S corp is going to be the best way for the business to proceed.

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