What is an S Corporation?
An S Corporation is a form of corporation that includes the benefits of incorporation while being taxed as a partnership—passing income directly to shareholders and avoiding double taxation. In order to file as such, companies must meet certain IRS requirements.
In an S Corporation tax election, profits earned by the company are not taxed at the corporate level, but rather at the level of the shareholders. In order to qualify, the company must:
- Be a domestic corporation
- Not have more than 100 shareholders
- Include only eligible shareholders
- Have only one class of stock
A company seeking an S Corporation election must start with an underlying entity (e.g., corporation, LCC, etc.), file IRS Form 2553, and be approved before filing taxes as such.
Other forms of business include a sole proprietorship and an LLC (Limited Liability Company).
A sole proprietorship is a form of business in which the company itself is not a legal entity, and a single owner is entitled to all profits and responsible for all liabilities.
An LLC is a form of business in which a company becomes a legal entity, providing limited liability to its owners.
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