An S corporation is a regular corporation with an “S corporation” tax status. This means that this corporation enjoys the benefits of a limited-liability corporation, but can pay income taxes on the same basis as a sole proprietor or a partnership.
The other type of corporation is called a C corporation. The C corporation is also known as a regular corporation. C corporations get taxed on business profits, and its owner also has to pay an individual income tax. S corporations are exempt from this form of double taxation.
The profits of an S corporation are filed through the owner’s personal tax returns, just like sole proprietorships, partnerships and limited-liability corporations. Like regular corporations, the S corporation does not pay taxes on income. This is true for most states; however, some states may tax an S corporation the way it does regular corporations. Before making a move, you should consult the tax division of your state treasury department.
There are some advantages an S corporation has over other forms of corporations. Aside from exemption from double taxation, having an S corporation status will allow you to claim business losses through your personal income tax return, enabling you to offset any other income you may have earned. Another advantage an S corporation has is that the shareholders are not subject to self-employment taxes.
Having an S corporation status does not come without its disadvantages. One is the limited number of shareholders that an S corporation is allowed to have. This type of corporation is limited to 100 shareholders. Another disadvantage is the fact that an S corporation may not deduct the cost of fringe benefits provided to its employee-shareholders who own more than 2% of the corporation.
Making the decision to file for an S corporation status for your business is not a permanent decision. At any time, you may switch to regular corporation status if you feel that it would be more beneficial for you.