S Corporation (S Corp) Overview
An S corporation is a tax status classification that some businesses can elect. S corps pass corporate income, losses, deductions, and credits to shareholders. In an S corp, profits and losses pass through to shareholders’ personal tax returns. For federal tax purposes, an S corporation is considered a pass-through entity.
Requirements and Process to Become an S Corp
To become an S corp, first incorporate your business then file IRS Form 2553. The IRS will review your file and tax returns to confirm if you are a C corp or S corp. S corps have some tax advantages but also limitations to consider before electing S-corp status, including restrictions on shareholders and stock.
Advantages of S Corp vs. C Corp
An advantage of an S corp over a C corp is no double taxation. S corp owners only pay taxes on distributed profits, while C corps pay corporate income tax, then shareholders pay tax again on dividends.
Tax Comparison and Considerations
C corporations pay corporate income tax, and shareholders pay personal tax on dividends, leading to double taxation. However, S corporations pass all income and losses to shareholders, who then pay only personal income tax.
Dissolution and Ownership
S corps can reopen after closing if they submit a final tax return. To dissolve an Ohio S corp, file Certificate of Dissolution Form 561. An S corp can be owned by U.S. citizens, permanent residents, certain trusts, and estates, but not by C corporations and partnerships. The key difference between a C corp and S corp is tax treatment.