Educational

What is an S-Corporation?

Welcome to our information page covering the formation, liability and taxation of S-Corporations. If you’re asking yourself “What is an S-Corporation?,” or are wondering if a Subchapter Corporation or standard Corporation (C-Corp) is the right choice for your business, you’ve come to the right place. An S-Corporation, better known as an S-Corp or Subchapter Corporation, is a standard corporation that has elected a special tax status with the IRS that get rids of the “double taxation” problem present in standard corporations. The tax advantage and liability protection of an S-Corp may seem great, but complexities are involved and not all businesses can legally form an S-Corp.

Registering an S-Corporation

Like a C-Corp or LLC, registering your business as an S-Corp requires plenty of paperwork and registration fees. Registration is done on a state-basis, so you must register your S-corp where the business operates or in a state that allows for non-resident Corporation or LLC registration. Registering for an S-Corp, C-Corp or an LLC can cost you thousands if you take the typical route and use a lawyer. Instead, we strongly suggest that you form your corporation or LLC using a trusted website, such as LegalZoom.com. Before registering your corporation, however, it is wise to do a business entity name search before taking any additional steps. If you do not do a business entity search, you can wait an extended period of time to hear about your filing, only to hear that your business entity name is taken and you have to restart the process. To avoid the hassle, make sure your business entity name is available by doing a free Business Entity Search.

S-Corporation Liability

Like an LLC or C-Corp, an S-Corp and its shareholders are not personally liable for any debts against the corporation. See the What is an LLC or What is a Corporation pages for more liability information.

S-Corporation Taxes

There are definitely tax benefits in forming an S-Corp. For starters, the double taxation existent in a C-Corp is eliminated. Instead, the IRS taxes S-Corps as pass-through entities like Sole Proprietorships, Partnerships, and most LLC’s. The S-Corp’s profits must be reported to the IRS, but taxes are not paid on profits but are instead filed on the personal income tax returns of the shareholders of the S-Corp. But remember, to form an S-Corp your business must fit the following qualifications:

– Total shareholders must be less than 75 members
– Shareholders cannot be non-resident aliens
– All shareholders must agree, in writing, that the corporation be formed as an S-Corp
– Shareholders must be individuals, estates, or qualified trusts (Shareholders cannot be companies. Unlike Corporations and LLc’s, where shareholders or members can be other companies.)
– The S-Corp can only have one type of stock (unlike C-Corp, which can have various forms of stock)

Summary

If you fit the S-Corp qualifications, forming an S-Corp will protect your business and its shareholders from liability, while simplifying taxes by allowing shareholders to file their earnings on their personal income tax return. The S-Corp is not all good however: you must have less than 75 shareholders and if you are planning on growing your business and eventually going public, you would need to change your S-Corp to a C-Corp; a complicated process. Bottom line: If you would like the credibility behind the “Inc.,” but want to avoid “double taxation” of a C-Corp (and fit the legal parameters), the Subchapter Corporation may be the right entity for you.