"S" CORPORATION

DEFINITION
An "S"  corporation is a structure offered specifically for small businesses.   While it offers limited liability for you as an owner, it also makes your corporation free from corporate income taxes.  Instead, any income your business makes is passed on to you, the owner, where you report that income on your own personal tax return as either wages, or dividends / profits.  Therefore,  your money only gets taxed once rather than twice like the regular "C" corporation discussed earlier.

return to home page

 One problem with a "c" corporation described previously is the fact that it is a separate, legal entity apart from yourself, the owner.  While this can be good from a personal liability standpoint, the problems arise in taxes.  Because your corporation is separate from you, it pays income tax on its earnings.  Then, any money that you take out of the business is taxed again.  If you take a salary as an employee, the tax is called payroll or employment tax.  If you take any profits out of the business, the profits (called dividends) are then taxed at your own personal tax return.  This "double taxation" of income is the major drawback of a "c" corporation.

One possible solution to the problem is to form a "s" corporation.  A "s" corporation is still a separate entity apart from its owners giving them limits on their liabilities to the business, but it is taxed like a partnership.  Meaning any money you take out is reported on your own tax return and the business itself pays no income tax.  Also, unlike a "c" corporation, losses of the business can be passed through to the owners allowing them to offset any income on their own personal tax returns.  So why isn't every business a "s" corporation?  Because there are limits on the number of owners and even who can be an owner in forming this structure.

You may want to consider this structure if you have fewer than 75 shareholders (owners) who are individuals and are seeking a possible tax break along with limited responsibility (liability) as an owner.  You may pass on this structure, if you are making excessive amounts of income which could put you into a tax bracket higher than that of a "c" corporation.