What Does an S Corp Do? Understanding S Corporations

Overview of S Corps

An S corporation (S corp) is a business structure that passes income, losses, deductions, and credits to shareholders. S corps avoid double taxation and are for small businesses with 100 or fewer shareholders. An S corp combines limited liability with pass-through taxation. Profits and losses pass through to shareholders who pay taxes at their individual rates.

Qualifying for S Corp Status

To become an S corp, a business must:

  • Be a domestic corporation
  • Have only certain allowable shareholders
  • Meet other IRS requirements

The benefits of an S corp include no double taxation and flow-through income to shareholders. Some income is still taxed at the entity level.

Application and Benefits

To establish S corp status, corporations must apply to the IRS and meet all qualifications. Meeting IRS qualifications is critical to achieve and maintain S corp status. The primary purpose of forming an S corp is to provide liability protection to its owners while avoiding the double taxation typically associated with traditional corporations.

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