Overview of S Corporation
An S corporation passes through income and losses to shareholders. The shareholders report income and losses on their tax returns, preventing double taxation. To be an S corporation, a corporation must meet eligibility criteria. For example, it must be a domestic corporation conducting affairs in its home country. The option to form an S corporation is not available to every corporation.
Tax Advantages of S Corporation
An S corporation works like a corporation while being taxed like a partnership. Profits and some losses pass through directly to owners without being subject to corporate taxes. Owners pay taxes on their portion of profits when they file individual returns. For instance, ABC Inc. earned $10 million profit in 2016. It has three shareholders – Sam, Todd and Sara – with ownership of 20%, 30% and 50%. Based on their ownership percentage, they will report the pass-through income and pay taxes when filing individual returns.
Formation and Requirements
S corporation status does not change business operations, but moves tax burdens from the business to owners. To form an S corporation, first incorporate as a general corporation, then elect S status by submitting IRS Form 2553. Corporations must follow formalities like holding annual meetings and keeping minutes. Before selecting S status, consult legal and tax professionals.