An S-Corporation is a unique business structure where the owners are able to avoid double taxation since they are exempted from paying corporate income tax on their company’s profits. In this case, all the profits and losses are passed to the shareholders. Therefore, the shareholders are only expected to file their individual tax returns after paying income tax like every citizen. Businesses with more than one shareholder are however required to submit informational tax returns that provide the details for the income of every shareholder.
The S-corporation was derived from a tax code chapter in the federal law in 1958. The S-corporation status requires the qualifying companies to comply with numerous constricting rules before being exempted from federal corporate tax. The state laws, however, treat S-corporations as regular corporations (IRS, 2018).
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S-Corporations compared to C-Corporations
An S-corporation is usually taxed as a flow-through entity which is the same case for partnerships and Limited Liability Companies. The “S” is a tax code in the sections of the internal revenue service. Under the “S” section, the shareholders of the companies are exempted from corporate taxes to avoid the incidences of double taxation as in the case of C-corporations. S-corporations and their shareholders do not pay federal income tax compared to c-corporations that pay both corporate and individual taxes.
Most business owners prefer S-corporations to C-corporations in a limited liability protection for their single taxation regime. However, the S-corporation entities are subjected to particular ownership restrictions compared to C-corporations. For instance, the owners of an S-corp should be less than 100 members for a single entity and should not be foreign citizens. Additionally, it is up to the IRS to decide if an S-corporation should be exposed to double or single taxation based on the compliance.
References
IRS. (2018, May 3). S Corporations | Internal Revenue Service. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
