What is an S Corporation?
An S Corporation, based on the United States’ Federal Tax Law, is any corporation that makes a valid election to be taxed specifically under Sub chapter S of Chapter 1 of the Internal Revenue Code. Because of this filing, the S corporation does not pay any federal income taxes; instead, the corporation’s net profits or losses are divided among and passed down to the company’s shareholders. Following this process, the shareholders must then report the income or losses on their own individual income tax returns; this concept is regarded as single taxation. The S corporation therefore possesses a unique taxation model; the majority of these corporations are fairly small with relatively few shareholders. If the corporation is taxed as a regular corporation it would incur double taxation, where both the corporation’s profits and the shareholder’s dividends will be taxed.
S Corporation Advantages:
Forming an S Corporation will yield significant benefits in terms of taxation, organization and protection from liability. The S Corporation status offers a number of the same benefits of a partnership formation, particularly in regards to taxation. That being said, while offering such tax benefits, S corporation advantages extend to liability protection—the owners benefit from limited liability protection from creditors. S Corporation advantages also extend to corporate losses, which are typically passed through to the organization’s shareholders. Furthermore, as the owner of an S corporation, the individual has the ability to place losses against income that appears on his or her personal returns.