What is an S Corporation?

An S corporation is a corporation that is treated, for federal tax purposes, as a pass-through entity through an election made with the Internal Revenue Service (IRS) to be considered an S Corporation.

As a corporation, an S corporation is created through filing Articles of Incorporation with the Secretary of State or similar government body.  It issues stock and is governed as a corporation.  The owners, who are called shareholders, have the same protection from liability as shareholders of a C corporation.  An S corporation shareholder's personal assets, such as personal bank accounts, cannot be seized to satisfy business liabilities.

However, like a sole proprietorship or a partnership, an S corporation passes through most of its income and loss items to the shareholders.  Unlike a regular corporation, there is no double taxation, once at the corporate level and again on the individual shareholder level.  Each shareholder is subject to his or her own individual tax rate on the income (or losses) passed through to him or her.

The advantages of an S corporation generally outweigh any potential disadvantages.  The S corporation structure can be especially beneficial when it comes time to transfer ownership or discontinue the business.  These advantages are typically unavailable to sole proprietors and general partnerships.  S corporation advantages include:

  • Protected Assets
  • Pass-through taxation
  • Easy transfer of ownership
  • Tax-favorable characterization of income

 

While, potential disadvantages may include formation costs and ongoing expenses, stock ownership restrictions and possible IRS scrutiny depending on shareholder salary.

If you have specific questions about which business structure is right for you and your business, please don't hesitate to contact us.

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