(Most - but not all - states follow the federal rules. An S corporation does not pay federal taxes at the corporate level. In a sole proprietorship or general partnership, owners and the business are legally considered the same - leaving personal assets vulnerable. Creditors cannot pursue the personal assets (house, bank accounts, etc.) of the shareholders to pay business debts.
Absent an express personal guarantee, a shareholder is not personally responsible for the business debts and liabilities. An S corporation protects the personal assets of its shareholders. These advantages are typically unavailable to sole proprietorships and general partnerships. The S corporation structure can be especially beneficial when it comes time to transfer ownership or discontinue the business. The advantages of an S corporation often outweigh any perceived disadvantages. S corporation advantages: tax benefits and more To become an S corporation, your corporation must submit Form 2553 Election by a Small Business Corporation signed by all the shareholders.
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The S corporation derives its name from Subchapter S of the Internal Revenue Code which provides corporations a "tax election" option - a choice on how they want to be taxed. Each shareholder is subject to his or her own individual tax rate on the income (or losses) passed through to him or her. Unlike a C corporation, there is no "double taxation", once at the corporate level and again on the individual shareholder level. However, like a sole proprietorship or a partnership, an S corporation passes through most of its income, losses, and deductions to the shareholders. An S corporation shareholder’s personal assets, such as personal bank accounts, cannot be seized to satisfy business liabilities. The owners (the shareholders) have the same protection from liability as shareholders of a C corporation.
An S corporation issues stock and is governed as a corporation, with directors, officers, and shareholders who function in the same manner as their C corporation counterparts. The state corporation laws make no distinction.
The difference between a C corporation and an S corporation is in how they are taxed under income tax laws. There is no requirement to notify your state of incorporation that your corporation will be an S corporation. Electing “S corp” status could lead to important tax benefits.Ī corporation is created by filing Articles of Incorporation with the Secretary of State or a similar government body. What is an S corporation (S corp)?Ī corporation is taxed for federal income tax purposes in one of two ways – as a “C corporation” or an “S corporation”.Īn S corporation is a corporation that is treated, for federal tax purposes, as a pass-through entity through an election made with the Internal Revenue Service (IRS). Many business owners assume it will be too costly or time-consuming - but neither is the case. Whether you are just starting your business, or have been operating as a sole proprietorship or general partnership, you may be wondering about the advantages of incorporating your business as an S corporation.
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