What is an S Corporation?

An S corporation is a profit corporation that made the election to be taxed under Subchapter S of the Internal Revenue Service Code. Under this option the corporation itself is not taxed, and all of its taxable income is taxed directly to the shareholders in proportion to their stock holdings, thus avoiding the double taxing of corporate earnings. This is very advantageous to companies that distribute to its shareholders most of the earnings or if the corporation has a net loss which the shareholders can offset in their individual income tax.

In order to be eligible for subchapter S election, the corporation must be domestic, it must only have one class of stock, no more than 100 shareholders. The shareholders must only be certain trusts, estates or individuals are not non-resident alien.

The management of an S corporation is centralized in the board of directors. The structure of a corporation is as follows, it is owned by its Shareholders, managed by a board of directors, and the day to day activities are handled by the corporation’s President and other officers. The duties and obligations of the shareholders, directors, or officers to the corporation and to each other may also be regulated by the corporation’s bylaws or shareholder agreements.

A corporation has perpetual existence and continues unaffected by changes in ownership or management.

Advantages in a nutshell:
1. Separate Legal Entity
2. Limited Liability
3. Continuity of Existence
4. Transferability of Ownership
5. Centralized Management
6. Pass-Through Taxation

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