What is an S Corp?

In my practice, I have come across a variety of things. Perhaps one of the more confusing business entities people area aware of is a sub chapter "S" corporation or S Corp. In general, an S Corp. is just like any other for profit corporation. In fact, from the outside looking in, the average person wouldn't ever see a difference. That's because, there really isn't a discernible difference from the outside.

Fundamentally, an "S" corp is nothing more than a Tax Election made with the IRS. While it is rare, LLC's, PA's or other business entities can elect for tax treatment as an S Corp. In order to make the election, you must meet very specific criteria as set be the IRS. In general, you need to have 1 class of stock, and less than 100 members/shareholders.

The next question you might ask is why would someone make this election? In general, to avoid what is known as double taxation. Double taxation is when a corporation or pays a corporate tax based on its profitability in a given year (TAX #1), and then the shareholders of that company pay income taxes on the dividends paid out by the company to them (TAX #2).  S Corp tax treatment avoids this sort of double taxation on profits. In an S Corp, any profits in a given tax year for the business are attributed to the owners of that business, regardless of whether or not those profits were ever paid out. That means, an owner of an S Corp could pay taxes on income they never actually received. However, when they do receive a distribution for those profits later (even years later), they wont have to pay taxes on them again.

If you have any questions about an S Corp election, or if it is right for you or your business, Contact Us for a free consultation.