The S Corporation

The S Corporation is a regular corporation. The "S" refers to sub chapter S of the Internal Revenue Code of 1986. Previously, S corporations were called "Sub chapter S corporations".The corporation is a regularly formed corporation under the laws of any of the 50 states. After the corporation is formed the S corporation files an application with the Internal Revenue Service to be treated as an S corporation.

Assuming the application for "S" status has been properly completed and filed in a timely manner the S corporation will be taxed very similar to a partnership. That is, for the IRS purposes (some states do not recognize S status and tax the corporation for state taxes as a regular corporation), the corporation will only file a tax return. It will pay NO taxes to the IRS, but the income and profits of the S corporation will be taxed to each shareholder according to their percentage of ownership interest, just as a partnership is taxed.

The advantages of corporate ownership are maintained in a S corporation. That is the limited liability, the free transferability, the centralized management, and the unlimited life of the corporation. The nice thing about a S corporation is that there is NO double taxation as there can be with a regular corporation.

The disadvantages of an S corporation is that it is limited to a maximum of 100 shareholders, limited to only one class of stock, only United States citizens or legal residents can be shareholders of S corporations, and other corporations, partnerships, limited liability companies cannot be shareholders, only "natural" persons (individuals). Additionally, the profits and losses must be distributed according to the each shareholder's interest.

Disclaimer: The information in these web pages has been prepared as a service to the community and does not constitute legal advice. This information may not apply to your situation particularly if you do not live in the state of California. Do not make legal decisions based on this material. Consult an attorney in person before making any important legal decision.