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S Corporation

An S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT).

What Distinguishes an S Corporation from Other Types of Business Entities?

In order to qualify for S corporation status, the IRS requires the corporation to be residentially located in the United States, retain fewer than 100 shareholders limited to individuals, trusts, and estates (excluding partnerships, corporations, and nonresident alien shareholders), issue only one class of stock, and not be classified as a financial institution, insurance company, or domestic international sales corporation.

The upshot of being an S corporation is that shareholders are able to avoid the double taxation on corporate income. Further, being classified as an S corporation allows the business entity to “pass-through” their business income, losses, deductions, and credits to shareholders for tax purposes, who pay taxes at ordinary income rates.

What Are the Advantages and Disadvantages of an S Corporation as Business Entities?

Unlike subchapter C corporations, an S corporation is not subject to the corporate income tax (CIT). Moreover, while an S corporation avoids that second layer of tax, it faces the same if not higher rates as an C corporation, depending on the ordinary income tax rates faced by its owners. In some states, an S corporation may be subject to certain annual reporting fees and taxes different than an C corporation.

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