About

S-Corporation (S-Corp) is a type of Corporation in the United States that has a preferential tax treatment under the Sub-chapter S of the Internal Revenue Code. Corporations (and limited liability companies that elect to be taxed as corporations) can elect that treatment if they qualify. Under this treatment the taxes are paid by the owners directly and double taxation problem is avoided.

To qualify, a corporation (or LLC taxed as a corporation) must be a US domestic corporation, have no more than 100 shareholders, all of which are individuals (married couples are counted as one), estates, certain exempt organizations, all of which are US residents/citizens. It must also have only one class of stocks, and certain additional restrictions.

All owners must agree to the Subchapter S treatment, and the corporation must remain qualified at all times. For example, a non-resident alien becoming a shareholder invalidates the S status immediately, and the corporation becomes a "regular" C-Corporation immediately.

Certain kinds of income also invalidate the S selection. For example, S corporation cannot have too much of passive/investment income.

All the income and expenses of S-Corporations flow to their owners' tax returns. The corporation files tax return on form 1120S, and delivers to each shareholder schedule K-1 (which is part of that filing) on which the portion of the income and the expenses attributable to that owner is reported. The owner then reports that on Schedule E of their individual tax returns (form 1040). This avoids the "double taxation" problem of the "regular" C-Corporations.

S-Corporations are commonly used by professionals who want the flexibility and the limited liability of the separate legal entity but cannot work under LLC (for example - lawyers, accountants, doctors), and others.