The S Corporation is a subtype of the corporation structure. It allows a C Corporation to elect to be taxed as a Partnership, with all business income taxed at the owner (shareholder) level at the tax rate for individuals.
What is an S Corporation?
S Corporations avoid the double taxation that Corporations normally face (i.e., some income taxed at the corporate rate and then again taxed at the individual rate when distributed to shareholders). One potential tax advantage for owners is that instead of all their business income is subject to self-employment tax, only owners’ salaries are. Any profit is given to shareholders as distributions are not taxed.
Some other advantages of a C Corp, such as personal liability protection, are retained. On the other hand, a number of restrictions on ownership of stock apply in an S Corporation. For example, it may only issue one class of stock, it may only have up to 100 stockholders and it cannot have shareholders who are nonresident aliens. Today, the IRS allows multiple types of entities to elect to be taxed as an S Corporation. For example, an LLC, just like a Corporation, could elect to be taxed as an S Corp if files for S Corporation Election by the required deadline.