An S corporation, or S corp, is a corporation that elects to be treated as a pass-through entity. It’s a popular option for small business owners, but might not be a good fit for startups.
S Corporation (S Corp) is a legal business structure that provides small business owners with certain tax benefits and limited liability protection. It is named after Subchapter S of the Internal Revenue Code, which outlines the rules and regulations governing this type of entity. An S Corporation is a hybrid entity that combines the advantages of a corporation with the pass-through taxation of a partnership or sole proprietorship.
In an S Corporation, the business's profits and losses are "passed through" to the shareholders, who report them on their individual tax returns. This means that the business itself does not pay federal income taxes. Instead, the shareholders are responsible for paying taxes on their share of the company's profits.
One of the key advantages of an S Corporation is that it offers limited liability protection to its shareholders. This means that the personal assets of shareholders are generally shielded from the company's debts and liabilities.
To qualify for S Corporation status, a business must meet certain eligibility requirements, such as having no more than 100 shareholders and being owned by U.S. citizens or resident aliens. Additionally, S Corporations are subject to specific rules and regulations regarding corporate governance and ownership restrictions.
Small business owners often choose to form an S Corporation to take advantage of the tax benefits and liability protection it offers. However, it is important to consult with a qualified tax professional or legal advisor to determine if an S Corporation is the right choice for your specific business needs and circumstances.