That said, most S-corps have some kind of transfer restriction that makes it harder for shareholders to exit than it would be for a C-corp. This flexibility extends to relative ease in transferring ownership of the company, through either an outright or gradual sale. Similarly, S-corps maintain an independent life from an owner-meaning the departure of key shareholders isn’t as big an obstacle to longevity as it might be for non-corporate business structures. This arrangement is referred to as “double taxation” and has historically been viewed as the price to pay for a corporation’s limited liability advantages.Īlong with the tax advantages, S-corps still enjoy the same protection from liability offered by corporation status. These shareholders still pay personal income tax on dividends taken home (at their own bracket’s marginal rate) but only after the whole of the corporation’s gains have been taxed at the corporate income tax rate (currently 21%). To contrast, C-corp shareholders are not allowed to write off corporate losses to offset other income on personal income statements. (Marginal tax rates currently range from 10% to 37%.) This also means shareholders who meet certain criteria are able to offset corporate losses with income from other sources on personal income statements. Instead, income from dividends is taxed only at the individual level under whatever marginal income tax rate applies. The IRS describes S-corps as corporations that, “pass corporate income, losses, deductions, and credits through to shareholders for federal tax purposes.” In other words, S-corps are exempt from a federal corporate income tax. The most defining characteristic of an S-corp is its so-called “pass-through” tax structure. S-corps are named from the subchapter of the Internal Revenue Code-subchapter “S”-under which the tax designation is spelled out. While a corporation is a type of business entity, an S-corp is a tax designation available to certain corporations and LLCs. These include holding regular meetings and keeping corporate records. Corporations are also subject to a number of legal requirements to which other types of businesses are not. In a small business, one person may serve in multiple roles.Īs a legal entity, a corporation is distinct from its shareholders, meaning shareholders aren’t personally responsible for debts of the corporation (the shareholder liability is limited to shareholder investment). The shareholders own stock in the company, the directors set policies and oversee the “big picture,” and the officers run the company day-to-day.
A corporation has shareholders, directors and officers. Corporations differ from sole proprietorships, partnerships or LLCs in a variety of ways. A corporation is a business entity that you form by filing incorporation documents with your state.
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