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What Is a Subchapter S Corporation (S-CORP)?

Commerce Glossary > Subchapter S Corporation (S-CORP)

Subchapter S Corporation (S-CORP) Definition | TLDR

A Subchapter S Corporation (S-Corp) is a business structure in the United States that provides certain tax benefits by allowing the company's income, losses, deductions, and credits to pass through to its shareholders for tax purposes, while still providing limited liability protection.

Subchapter S Corporation (S-CORP) Meaning

A Subchapter S Corporation, commonly referred to as an S-Corp, is a business structure that offers the legal protections of a corporation while providing the tax advantages of a partnership or sole proprietorship. Under U.S. tax law, an S-Corp is considered a pass-through entity, meaning that the company's profits and losses are passed through to the shareholders and reported on their individual tax returns. This structure allows S-Corp shareholders to avoid double taxation, where income is taxed at both the corporate level and the individual level, as seen in traditional C-Corporations.

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A Subchapter S Corporation, commonly referred to as an S-Corp, is a business structure that offers the legal protections of a corporation while providing the tax advantages of a partnership or sole proprietorship. Under U.S. tax law, an S-Corp is considered a pass-through entity, meaning that the company's profits and losses are passed through to the shareholders and reported on their individual tax returns. This structure allows S-Corp shareholders to avoid double taxation, where income is taxed at both the corporate level and the individual level, as seen in traditional C-Corporations.

One of the primary benefits of forming an S-Corp is the pass-through taxation structure, which allows shareholders to report business income and losses on their personal tax returns. This can result in potential tax savings, as S-Corp shareholders are not subject to self-employment taxes on their share of the company's profits, unlike owners of sole proprietorships or partnerships. In addition, S-Corps offer limited liability protection to shareholders, shielding personal assets from business liabilities and debts. However, S-Corps require compliance with certain administrative and regulatory requirements, such as holding regular shareholder meetings, maintaining corporate records, and adhering to specific filing deadlines with state and federal authorities.

FAQs

No. To qualify as an S-Corp, a corporation must have only one class of stock, meaning that all shareholders have the same rights and privileges regarding voting power, distribution of dividends, and liquidation preferences. Having multiple classes of stock would disqualify the corporation from S-Corp status.

Yes. Similar to a traditional C-Corporation, forming an S-Corp provides limited liability protection to shareholders, which means that personal assets are generally shielded from business debts and liabilities. However, this protection is not absolute, and certain circumstances may expose shareholders to personal liability.

No. Not all business structures are eligible to elect S-Corp status. To qualify, a business must first be structured as a domestic corporation and meet specific eligibility criteria outlined by the IRS, such as having no more than 100 shareholders and meeting certain ownership requirements.

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