An S corporation is a corporation created under state law that elects to be treated as a pass-through entity (like a sole proprietorship or partnership) for tax purposes. Since all corporate income is "passed through" directly to the shareholders who include the income on their individual tax returns, S corporations are not subject to double taxation. Moreover, the accounting for an S corporation is generally easier than for a C corporation.
S corporation formation requires filing with the appropriate state agency as well as a filing fee just like a C corporation. In addition an additional tax election form must be completed to designate the subchapter S status.
- Special tax election allows pass through taxation directly to shareholders and the avoidance of "double taxation"
- Accounting for an S corporation is generally easier than for a C corporation
- Enjoys the same level of liability protection as a C corporation
- Enjoys many of the same benefits of a C corporation
- More expensive to form and maintain than sole proprietorships and partnerships
- Have many of the same rigorous ongoing business requirements as does a C corporation
- Several restrictions that are specific to S corporations including
- Limit of 100 shareholders
- Shareholders must be US citizens or legal residents
- Only permitted to have one type of stock
- Limits on types of income (e.g. passive income from real estate, royalties etc.)