S Corporation

The S Corporation is a C Corporation that meets certain requirements under Subchapter S of the Internal Revenue Code. It has a special tax designation that allows the income and expense of the corporation to be ignored at the corporate level so that the shareholders pay taxes on the net income earned and claims all losses of the corporation as their own. For the small corporation it is possible to minimize or eliminate these taxes by paying employee-owners a salary, which is a legitimate business expense and is tax deductible. The corporate tax rate is lower than the highest personal income tax rate with corporations and there are other benefits available to corporations that may not be available to other business forms.

The rules that govern S Corporations make them unavailable and unattractive in a lot of situations. All shareholders must be U.S. citizens, have no more than 75 shareholders, may not be a bank, thrift or insurance company, and must have a fiscal year that ends on December 31 of each year. All the shareholders must agree with the S corporation status. As with a regular corporation the record keeping requirements must be maintained to insure the corporation continues to have its limitation of liability status. If you expect profits to be enough higher than fair market salary to justify the additional payroll record-keeping costs, then S-corporation makes more sense.