S corporation

Definition

An S corporation is a type of corporation that meets specific Internal Revenue Code requirements and elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. This allows S corporations to avoid double taxation on the corporate income.

5 Must Know Facts For Your Next Test

1. S corporations can have up to 100 shareholders.
2. Shareholders of an S corporation must be U.S. citizens or residents.
3. S corporations do not pay federal income taxes at the corporate level.
4. Profits and losses are passed through to shareholders and reported on their individual tax returns.
5. S corporations must file Form 2553 with the IRS to obtain S corporation status.

Review Questions

• What is one major tax advantage of an S corporation?
• How many shareholders can an S corporation have?
• What form must be filed with the IRS to elect S corporation status?

Related terms

C Corporation: A type of corporation that is taxed separately from its owners and subject to double taxation on its income.

Limited Liability Company (LLC): A business structure that combines the limited liability protection of a corporation with the tax benefits of a partnership.

Pass-Through Taxation: A tax treatment where business profits are passed through to the owners' personal tax returns, avoiding double taxation.