Sub-chapter S Corporation

An S corporation is a special form of corporation. It was created to give the owners of the business all the benefits (including liability protection) of the regular corporation but without high corporate taxes. It files an informational return (IRS Form 1120-S) and profits and losses flow through to the shareholders.

Some features of this entity include:

• Personal liability of the owners: Shareholders have no personal liability for the obligations of the corporation.
• Taxation: Entity generally not taxed as the profits and losses are passed through to the shareholders.
• Business formation: State filling including articles of incorporation and stock certificates are required.
• Membership rules: 75 or fewer American shareholder are allowed.
• Management: Managed by the board of directors and officers.

The advantages of choosing this business entity are:

• Liability protection for stock holders.
• Income is only taxed once at the shareholder level.
• Losses can be used to offset personal income.
• Profits are usually not subjected to self-employment tax.

The disadvantages include:

• Has only one class of stock.
• More federal requirements and potential state requirements.
• Under more IRS scrutiny.