An S Corporation is a form of corporation in which all income is passed through to its owners (called shareholders) and is taxed at the individual level. Corporations are treated as entirely distinct entities from the individuals that own them. They can be either privately owned or publicly traded.
Inherent to corporations is a concept known as the ‘corporate veil.’ This is the key to individual owners being free from liability for debts incurred by a corporation. This also often allows owners to name additional officers to manage a corporation, while protecting their own individual interests in the event these officers make poor business decisions. An S corporation allows shareholders to get the benefit of individual taxation with the stronghold that is the corporate veil.
S Corporations are taxed at the individual level. A C corporation may elect to be treated as an S corporation by filing IRS Form 2553. Wages paid to officers are taxed at individual income tax rates, while all other income is ‘passed through’ on Schedule K-1’s to individual taxpayers’ returns. This arrangement avoids what is often referred to as “double taxation,” wherein individuals may end up paying taxes on post-tax (already taxed) income from the corporations they share ownership in.
- Limited individual liability due to ‘corporate veil’
- ‘Shares’ system makes transfer of ownership simple
- State statutes provide specific rules for governance, creating predictability for investors and court proceedings
- Tax regime prevents ‘double taxation’ by passing income through to the individual tax returns of its owners
- Filing fees may be higher, and bylaws and operating agreements may have to be more specific
- Managers will need to be named specifically as officers of the corporation, or will require corporate resolutions specific to certain actions
Start My S Corp