An S corporation is a regular corporation that has chosen to be taxed under Subchapter S of the Internal Revenue Code. This means that the S corporation will have many of the benefits of a C corporation (limited liability, perpetual existence), but without the main disadvantage of double taxation.
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- Limited liability
- No double taxation at the federal level and in most states
- Perpetual existence (corporation survives even if shareholder leaves or sells his or her shares)
- Required to maintain corporate formalities (holding meetings, maintaining meeting minutes, preparing resolutions, etc.) or else risk losing limited liability protection
- Restrictions on number and types of shareholders may discourage outside investment (though a corporation can drop its S status if this becomes an issue)
S Corporation Basics.
An S corporation begins its life as a regular C corporation. But when the corporation elects to be taxed as an S corporation, its profits and losses are no longer subject to federal tax at the corporate level, as is the case with C corporations (though some states do impose taxes on S corporations at the corporate level). Instead, those profits and losses are passed through to the shareholders, who pay taxes on their share of the income when they file their individual tax returns. An S corporation therefore avoids the double taxation that C corporations are subject to.
Not all corporations may become S corporations. To qualify, the corporation must meet several requirements, including the following:
The structure of an S corporation is the same is that of a C corporation. It is owned by its shareholders, who elect the corporation’s board of directors. The board of directors is responsible for representing the shareholders’ interests, setting the corporate vision and strategy, and making major decisions. The board of directors also appoints corporate officers, who manage the company’s daily operations. The required officer positions usually include a Chief Executive Officer, Chief Financial Officer, and Secretary.