An S Corporation, also known as an S Corp, is a specific type of corporation that provides certain tax advantages to its shareholders. The name “S Corporation” comes from Subchapter S of the Internal Revenue Code, which governs its formation and operation.
One of the main benefits of an S Corporation is that it allows for “pass-through” taxation. This means that the corporation itself is not subject to federal income tax at the corporate level. Instead, the profits and losses of the corporation are passed through to the shareholders, who report them on their individual tax returns. This avoids the issue of double taxation that is typically associated with traditional C Corporations.
To qualify as an S Corporation, certain requirements must be met. The corporation must be a domestic corporation, have only allowable shareholders (individuals, certain trusts, and estates), have no more than 100 shareholders, and have only one class of stock. Additionally, shareholders must be U.S. citizens or residents, and certain types of businesses, such as financial institutions and insurance companies, are generally not eligible for S Corporation status.
In addition to the tax advantages, an S Corporation provides limited liability protection to its shareholders. This means that the personal assets of the shareholders are generally protected from the corporation’s debts and liabilities.
S Corporations are popular among small to medium-sized businesses that want the legal structure and limited liability protection of a corporation while enjoying the tax benefits of pass-through taxation. It’s important to note that the specific regulations and requirements for forming and operating an S Corporation may vary by jurisdiction, so consulting with legal and tax professionals is recommended when considering this business structure.