S-Corporation or “S-Corp.”

  • An S-Corporation is an entity that stands alone from its owners for liability purposes but is also known as a “pass through entity” because the S-Corporation does not pay income taxes on its profits but rather passes through those profits to its shareholders. Then each shareholder reports his or her share of the S-Corp.’s income and losses on his/her individual income tax return. The S-Corporation is owned by a limited number of stockholders (maximum 75). The stock is easily transferable and can be sold to raise capital but must be within IRS guidelines. Like the C-Corporation, at minimum an annual board of directors and shareholders’ meeting must take place where major decisions are recorded, and the results of operations are reported at least annually, or as is dictated by the corporate by-laws. The S-Corporation has an unlimited life, separate from the illness or death of any owners. Primary advantages of the S-Corporation: Limited personal liability for the S-Corporation’s debts; No taxation of profits to the Corporation. The S-Corporation’s profits are not taxed at the corporate level like the C-Corporation. Instead, profits and losses are passed through to the shareholders who report their share of the S-Corporation’s profits on their personal tax returns. Shareholders can offset profits from one S-Corporation against losses from another S-Corporation. The S-Corporation prepares an information tax return known as a Form 1120S and also prepares a Form K-1 for each shareholder. For example, if there are 10 individuals who own equal stakes in the XYZ S-Corp., and the S-Corp. earns a profit of $200 this year, each shareholder would receive a K-1 that allocates 10% of the S-Corporation’s income (profit) to him/her, or $20 (10% of $200); S-Corporation owners may receive some income tax deductions for certain business expenses. Primary disadvantages of the S-Corporation: An S-Corporation must distribute its income to the shareholders in accordance with the owners’ ownership interests; An S-Corporation is typically more complicated to run and manage than an LLC.
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