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What is an S Corp?

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  • Written By: John Sunshine
  • Edited By: Niki Foster
  • Last Modified Date: 21 July 2014
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An S corp is a special type of corporation in the United States, and is often compared to a sole proprietorship or partnership. In a normal or C corporation, the business becomes an entity unto itself and is liable for the contracts that it enters into as well as any obligations, such as product warranty or liability, that are a result of doing business. This normally means that the corporation is also liable for income taxes on the earnings it receives. In an S corp, however, the earnings flow through to the owners. This means that the owners report any losses or earnings on their personal tax returns rather than the company filing separately.

In many ways, this type of corporate structure can combine some of the advantages of incorporation with those of a sole proprietorship. An entrepreneur who is interested in incorporating his business to limit his personal liability may chose to do so with this type of structure, protecting his personal assets in the event of business failure. A simple sole proprietorship or partnership does not provide this protection. A C corporation is often subject to double taxation, however, meaning that earnings are taxed at the federal level both when reported by the company and when reported by the owners as income. Setting up as an S corporation avoids this.

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S corps are not treated the same in every state, and some places treat them like any other corporation as far as tax liability goes. For this reason, someone considering setting one up should seek professional legal advice before committing to this type of structure. Even in states that allow S corps to pass earnings through to the entrepreneur, whether or not to incorporate under this structure rather than as a C corporation is a complex tax question, and an entrepreneur should get professional accounting and legal advice on his or her particular situation. While there may be some tax advantages, there are also strict rules that the corporation must follow. In some cases, these rules or restrictions may negate the benefits.

Every company should be assessed individually to determine the advantages and disadvantages of incorporating under this status. The possible benefits are dependent on both the actual and expected earnings of the company, as well as the financial position of the entrepreneurs involved. Fortunately, if a business decides on an S corp structure and the reasons for choosing it change, the corporation can be converted to a C corporation with some minor legal and accounting assistance.

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Discuss this Article

John57
Post 16

How complicated is it to change from a C corp to an S corp? When I started out my business, I wasn't expecting to make much of a profit right away, so filed as a C corp.

Now, from a tax standpoint, I think it would be better to be an S corp, but am not sure how I go about doing it.

julies
Post 15

I know that some people are reluctant to form an S corp because of the extra paperwork involved. You have to hold annual meetings, create bylaws and resolutions and make sure you follow the procedures to operate as a corporation.

The advantage to this is the protection and tax advantages that you receive. An S corp can take more tax deductions than something like an LLC can.

With all the paperwork involved you also have more complex accounting. I have all my S corp accounting done by a professional even though I complete my own personal taxes. For me this is worth it to know it is done right, and I receive all the deductions I am entitled to.

SarahSon
Post 14

If you have a business, it really is smart to look at all the advantages a corporation offers. A good attorney or financial adviser will tell you to never mix personal and business assets.

With an S Corp you can decrease the chances of losing your personal assets if there is ever a liability issue. For me, it just makes common sense to form an S corp if you are really serious about your business.

honeybees
Post 13

When my husband and I were looking at incorporating our business, we were trying to decide between an S corp or a C corp, which is a regular corporation.

Because our business had been in existence for awhile, and we were making a profit, we decided to go with an S corp because of the tax advantages.

It is my understanding with an S corp that you need to show a profit 3 out of 5 years. If you are a new corporation starting up, this might not always be the best route to go.

anon147565
Post 12

Of course, Single Member LLCs initially appeared attractive with the possibility of obtaining similar liability protection as a corporation affords yet avoiding the double-tax at the corporate level with the pass-through taxation that a LLC affords.

There are additional benefits of the Single Member LLC in that it may own stock in an S corporation or may engage in a 1031 real estate exchange.

anon83027
Post 11

When i went to get my business bank account they put the title, My Company Inc.

anon51044
Post 9

I am the owner of an S Corp. It has not been active as the business sold 3 years ago. Now I am personally being sued by a vendor who thinks I owe him on an invoice. (I do not owe him money but pulling out three year old evidence will be tricky.) Can I personally be sued for a debt of an S Corp?

anon46508
Post 8

does a single member LLC provide liability protection of personal assets?

anon37090
Post 7

In creating an 'S' corp; would one use the INC.

after their name ? i.e. ABC Company, Inc ??

payless
Post 5

How can business debt be transferred to a new formed S Corp?

anon23956
Post 3

If a 5% share holder in a S-corp decides to leave the company...what items need to be shared with the small percentage owner each year, if any? In other words, do you have to provide anything to them besides your K-1 at the end of the year?

anon13447
Post 2

what is the answer? Can a s-corp and its vehicles/equipment remain safe if the primary 100% shareholder defaults on a personal loan/mortgage?

cpssteve
Post 1

Can anyone tell me if in a Sub S Corp, does the liability protection reverse? In other words, if the owner of 100% of the stock declares personal bankruptcy, is the S Corp liable for any of the debt?

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