Term: S Corporation
Type: Business entity / tax designation
Used in: U.S. business formation and taxation
Governed by: Internal Revenue Code Subchapter S
Also Known As: Pass-through corporation
Definition
An S Corporation is a special type of corporation in the United States that elects to pass corporate income, losses, deductions, and credits directly to shareholders for federal tax purposes. This structure avoids double taxation while maintaining the benefits of limited liability.
Unlike C Corporations, S Corps are not taxed at the corporate level. Instead, income is taxed once at the individual level, making S Corps attractive for small to mid-sized businesses with consistent profitability.
Key Features
- Pass-Through Taxation: Income taxed on owners’ personal tax returns
- Limited Liability: Protects personal assets of shareholders
- Shareholder Limit: Max 100 U.S. shareholders
- One Class of Stock: No preferred stock allowed
- Must Be Domestic: Cannot include non-resident aliens as shareholders
Common Use Cases
- Family-owned or closely held businesses
- Entrepreneurs seeking liability protection and tax efficiency
- Contractors or consultants incorporating for tax reasons
- Businesses converting from LLC or C Corp for tax advantages
Benefits or Advantages
- Avoids corporate double taxation
- Allows income splitting between salary and distributions
- Retains corporate legal protections
- Simpler taxation than a C Corporation
- May lower self-employment tax under certain structures
Examples or Notable Applications
A small marketing firm elects S Corp status to reduce tax burden. An LLC with one owner converts to S Corp to pay part of earnings as salary. Popular choice for doctors, lawyers, and service-based business owners.
External Links
This post is for informational purposes only and does not constitute tax or legal advice. Always consult a professional before forming a business entity.