What is an S corporation?

Introduction

Rather than being a distinct type of corporation from a corporate standpoint, an S corporation is an election under the U.S. tax code.

Benefits of an S Corporation

The primary benefit of electing as an S Corporation is the avoidance of double taxation.

Corporations are usually taxed as C Corporations, which means that they are taxed both at the entity level and at the shareholder level.

An S Corporation provides the limited liability benefits of a C Corporation with the tax benefits of being a LLC (limited liability company).

Drawbacks of an S Corporation

An S Corporation is limited in ways that a C Corporation is not.

An S Corporation can only have:

(1) a maximum of 100 shareholders;

(2) one class of stock;

(3) stockholders who are individuals, single-member LLCs, estates, trusts, or certain tax exempt entities.

An S Corporation cannot have corporations, multi-member LLCs, partnerships, or non-resident alien stockholders.

The S Corporation election is also only available to corporations incorporated in the United States; foreign corporations do not have the option to make the S Corporation designation.

Conclusion

An S Corporation election can be a good option for corporations (which satisfy the aforementioned requirements) to avoid double taxation.

An alternative to electing as an S Corporation would be to convert the corporation into a LLC; this would avoid double taxation without having to meet the limitations of an S Corporation.

However, converting a corporation into a LLC generally requires more work than making an S Corporation election, so it’s important to keep that in mind in deciding which path to take.

Disclaimer

This is not legal advice and does not create an attorney-client relationship between you and the author. This article is being furnished for educational purposes only.

The author makes no warranty as to the accuracy, completeness or applicability of the information and undertakes no obligation to update the information.