A subchapter S corporation, commonly known as an S corporation, is a specific type of corporation that is established under Subchapter S of the Internal Revenue Code (IRC) of the United States. This designation allows certain corporations to avoid being taxed at the corporate level and instead pass their income, deductions, and losses through to their shareholders to be reported on their individual tax returns.
To qualify as an S corporation, a company must meet certain eligibility requirements, such as having no more than 100 shareholders, all of whom must be U.S. citizens or residents and cannot be corporations or partnerships. Additionally, the company can only have one class of stock, and it cannot own subsidiaries that are not also S corporations.
The advantage of operating as an S corporation is that it allows shareholders to avoid the double taxation typically associated with regular corporations. By passing the corporation's income through to individual shareholders, they can report it as personal income and potentially qualify for lower tax rates. In this manner, S corporations are treated similarly to partnerships or limited liability companies (LLCs) in terms of taxation.
However, S corporations are subject to certain limitations, such as restrictions on foreign ownership and the ability to issue different classes of stock. Moreover, these corporations must follow strict guidelines for maintaining corporate formalities and recordkeeping. Failure to comply with these rules may result in the loss of S corporation status and the imposition of corporate-level taxation.
In conclusion, a subchapter S corporation is a type of corporation that elects to be taxed under Subchapter S of the IRC, allowing it to pass its income, deductions, and losses through to its shareholders.
