Small Business Loans | Unsecured Credit

S Corporation

The S Corporation is a corporation who has elected to be taxed as a "pass-through" entity (as if the owners were sole proprietors or partners). All corporate profits and stock dividends are reported by the owners as personal income. This type of structure blends the tax advantages of a sole proprietorship or partnership with the limited liability and prestige of a corporation. Many small businesses elect this status. To be eligible for this status:

All shareholders must be citizens or permanent residents of the United States

The number of shareholders may not exceed 100

Only one class of stock may be issued

No more than 25% of gross corporate income may be derived from passive income

If held by a small business trust, the beneficiaries of the trust must be individuals, estates or charitable organizations.

Banking institutions, insurance companies taxed under Subchapter L and certain affiliated corporation groups are ineligible.

An S Corporation is a special form of corporation (Note: The "S" in S Corporation refers to subchapter S of the tax code). S Corporations are based on C Corporations but they are not treated as a separate tax entity as C Corporations are.

Instead, the income of an S Corporation is "passed through" to the personal income of its owners (shareholders) in proportion to their ownership interest. An S Corporation is created by forming a traditional C Corporation first, and then filing the IRS Form 2553 (The Subchapter S Election) for federal recognition of S Corporation tax status. While the S Corporation has many of the same features as a C Corporation, there are some important differences.

Note: While the S Corporation features similar pass through taxation to an LLC, in the area of self-employment taxes an S Corporation can have an advantage over an LLC. The compensation (salary and bonuses) of S Corporation shareholders is subject to self-employment tax, but not on the profits automatically allocated to them as a shareholder. This can be an advanced and aggressive tax strategy, so be sure to consult with the appropriate tax and legal specialists before pursuing it.

S-Corp Advantages