S Corporation
An S Corporation is a special form of corporation (Note: The "S" in S Corporation refers to subchapter S of the tax code). S Corporations are based on C Corporations but they are not treated as a separate tax entity as C Corporations are. Instead, the income of an S Corporation is "passed through" to the personal income of its owners (shareholders) in proportion to their ownership interest.
An S Corporation is created by forming a traditional C Corporation and then filing the IRS Form 2553 (The Subchapter S Election) for federal recognition of S Corporation tax status. While the S Corporation has many of the same features as a C Corporation, there are some important differences.
Note: While the S Corporation features similar pass through taxation to an LLC, in the area of self-employment taxes an S Corporation can have an advantage over an LLC. The compensation (salary and bonuses) of S Corporation shareholders is subject to self-employment tax, but not on the profits automatically allocated to them as a shareholder. This can be an advanced and aggressive tax strategy, so be sure to consult with the appropriate tax and legal specialists before pursuing it.
S-Corporation Advantages
- Limited Personal Liability
- Perpetual Existence
- Better Fringe Benefits
- Pass-Through Taxation
S-Corp Disadvantages
- More extensive record keeping requirements
- Restrictions on number and type of allowable shareholders
- Additional Restrictions
