A sub-chapter S-corporation (S-Corp) a special type of corporation created through an IRS tax election. An S-Corp is limited in the number of employees it can have before it becomes a “regular” C-corporation. A corporation is a good entity for people who want to create a long-term, closely-held business with a small number of employees.
An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S-Corp. To be considered an S-Corp, you must first charter a business as a corporation in the state where it is headquartered.
The S-Corp has many requirements and conditions, but can be very beneficial because of the tax benefits. An S-Corp is a “pass-through” entity for tax purposes, which means it generally does not pay an entity-level tax. Instead, the S-Corp’s profits and losses generally pass-through to its stockholders who include their respective share of those items on their income tax returns (whether or not distributed). There are some specific rules regarding how a shareholder who is an employee of the company is taxed.
The corporate structure also limits the financial liability for which you (the owner, or “shareholder”) are responsible.
The difference between an LLC and an S-Corp is that an LLC does not have the same level of corporate formality that a corporation has. There are also differences in how taxes, wages, and deductions are treated.
Contact the attorneys at Abendroth Russell Barnett Law Firm to discuss your corporation.