S Corporation

An S Corporation is a special form of corporation (Note: The "S" in S Corporation refers to subchapter S of the tax code). S Corporations are based on C Corporations but they are not treated as a separate tax entity as C Corporations are. Instead, the income of an S Corporation is "passed through" to the personal income of its owners (shareholders) in proportion to their ownership interest.

An S Corporation is created by forming a traditional C Corporation and then filing the IRS form 2553 (The Subchapter S Election) for federal recognition of S Corporation tax status. While the S Corporation has many of the same features as a C Corporation, there are some important differences.

While the S Corporation features similar pass through taxation to an LLC, in the area of self-employment taxes an S Corporation can have an advantage over an LLC. The compensation (salary and bonuses) of S Corporation shareholders is subject to self-employment tax, but not on the profits automatically allocated to them as a shareholder.

Entity Comparison Chart
	C Corporation	S Corporation	LLC
Owners have limited liability for business debts and obligations
Created by a state-level registration that usually protects the company name
Business duration can be perpetual
May have an unlimited number of owners
Owners need not be U.S. citizens or permanent residents
May be owned by another business, rather than individuals
May issue shares of stock to attract investors
Owners can report business profit and loss on their personal tax returns
Permitted to distribute special allocations, under certain guidelines
Not required to hold annual meetings or record meeting minutes
Owners have NO personal liability for business obligations
Number of owners allowed	1 to unlimited	1 to 100	1 to unlimited
Management decisions made by...	Board of Directors	Board of Directors	Members
Raising Capital	Sale of stock & other permitted instruments	Sale of stock & other permitted instruments	From the members
Income Taxes	Paid by the corporation	Passed through & paid by the shareholders	Paid by members unless elect corporate tax status
Who Deducts Losses	Corporation	Passed through to the shareholders	Special rules apply - check with tax advisor
Taxation	Double; both the corporation and shareholders are taxed	Taxed Once	Taxed Once
Transfer of ownership	By stock transfer	By stock transfer	Most LLC Agreements require approval of members

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