S corporation

A form of corporation that meets the IRS requirements to be taxed under Subchapter S of the Internal Revenue Code. This gives a corporation with 100 shareholders or less the benefit of incorporation while being taxed as a partnership. This means that any profits earned by the corporation are not taxed at the corporate level, but rather at the level of the shareholders. Also known as "S corporation".

Investopedia Says:
Having S corporation status can prove a huge benefit for a corporation. The corporation can pass income directly to shareholders and avoid the double taxation that is inherent with the dividends of public companies, while still enjoying the advantages of the corporate structure. In order to qualify, a corporation must be a small business corporation. This means the following requirements must be met:

1) Must be a domestic corporation
2) Must not have more than 100 shareholders
3) Must include only eligible shareholders
4) Must have only one class of stock

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Corporation with a limited number of stockholders (35 or fewer) that elects not to be taxed as a regular (C) corporation and meets certain other requirements. Shareholders include in their personal tax returns their Pro Rata share of capital gains, ordinary income, tax preference items, and so on. This form avoids corporate Double Taxation while providing limited liability protection to shareholders of a corporation.

Corporations that have elected to be taxed according to the provisions of Subchapter S of the Internal Revenue Code. In order to qualify under these provisions, the corporation can have only one class of stock. By so qualifying, tax is eliminated at the corporate level and the shareholders are taxed on their proportionate share of the corporation's profit. This is important because currently the highest individual income tax rate is lower than the highest corporate income tax rate.

A Corporation with a limited number of stockholders (75 or fewer) that elects not to be taxed as a regular corporation, and meets certain other requirements. Shareholders include, in their personal tax return, their pro-rata share ofCapital Gains, Ordinary Income, Tax Preference items, and so on. See Passive Income.
Example: To avoid Double Taxation the ABC Real Estate Corporation elects Subchapter S status. Its shareholders will include corporate income in their own tax return, whether or not they receive a dividend. The corporation itself will not pay an income tax, but will file an information tax return.

Form of corporation whose stockholders may be taxed as partners. That is, income is taxed as direct income of the shareholders, regardless of whether it is actually distributed to them. To qualify as an S corporation, a company cannot have more than 35 shareholders; it cannot have more than one class of stock; it cannot have any nonresident foreigners as shareholders; and it must properly elect S corporation status. The key advantage of this form of organization is that the shareholders receive all the organizational benefit of a corporation while escaping the double taxation of a corporation.

A type of corporation that is taxed under subchapter S of the Internal Revenue Code (26 U.S.C.A. § 1 et seq.).

An S corporation differs from a regular corporation in that it is not a separate taxable entity under the Internal Revenue Code. This means that the S corporation does not pay taxes on its net income. The net profits or losses of the corporation pass through to its owners.

An S corporation must conform to a state's laws that specify how a corporation must be formed. At minimum, articles of incorporation must be filed with the secretary of state. An S corporation must also file a special form with federal and state tax authorities that notifies them of the election of the subchapter S status.

A corporation may be granted S status if it does not own any subsidiaries, has only one class of stock, and has no more than seventy-five shareholders, all of whom must be U.S. citizens or U.S. residents. A corporation may elect S status when it is incorporated or later in its corporate life. Likewise, a corporation may elect to drop its S status at any time.

An S corporation status is attractive to smaller, family-owned corporations that want to avoid double taxation: a tax on corporate income and a second tax on amounts distributed to shareholders. This status may also make financial sense if a new corporation is likely to have an operating loss in its first year. The losses from the business can be passed through to the individual shareholder's tax return and be used to offset income from other sources.

An S corporation also avoids audit issues that surround regularly taxed corporations, such as unreasonable compensation to office-shareholders. Finally, S status may avoid problems raised by corporate accounting rules and the corporate alternative minimum tax. These problems are eliminated because the income is taxed to the shareholders.

An S corporation can deduct the cost of employee benefits as a business expense. However, shareholders who own more than two percent of the stock are not considered employees for income tax purposes and their benefits may not be deducted. Tax advantages can be achieved in some cases because income can be shifted to other family members by making them employees or shareholders (or both) of the corporation.

Appreciation of the business also can be shifted to other family members as a way to minimize death taxes when an owner dies. When an S corporation is sold, the taxable gain on the business may be less than if it had been operated as a regular corporation.