S-Corporations

A Little About the

S-Corporation

S Corporations combine some of the advantages of a corporate structure with the “pass-thru” tax advantage of partnerships. “Subchapter S” is a reference to the tax code sections that distinguish the “S Corporation” from the traditional “C Corporation” under Subchapter C and by which income is taxed only once at the shareholder level. C Corporations are taxed at both the entity level and the dividend level (this is commonly referred to as the “double taxation” effect inherent in C Corporations). Before LLC’s, S Corporations were perhaps the most common form of ownership for smaller, privately-held corporations. S Corporations include certain shareholder and ownership restrictions that are not applicable to LLC’s.

  • All S Corporations provide limited liability protection to their owners/shareholders. Shareholder liability is limited to their investment in the entity. S Corporation liabilities are limited to the assets and resources of the entity. (LLC’s, C Corporations and limited partnerships provide similar protection. Proprietorships and general partnerships do not.)
  • S Corporations are owned by shareholders and managed by a board of directors and officers. LLC’s offer more flexibility in these areas than corporations and partnerships.
  • Shareholders may number 1 or more with a maximum of 100. Shareholders are limited to resident individuals with certain limited exceptions. Shareholders may not include LLC’s, partnerships, corporations, etc., or foreign individuals or entities. )LLC’s, C Corporations and partnerships offer more flexibility. Proprietorships and S Corporations do not.)
  • Shareholder interests are restricted to one class and may not include different classes, voting rights, capital or profits interests, etc. (C Corporations and partnerships offer more flexibility. Proprietorships and S Corporations do not.)
  • S Corporations are managed by a board of directors and officers. Directors and officers (including shareholders acting as directors or officers) are protected by the “business judgment rule” for decisions made in good faith, but may be individually liable for gross negligence or willful misconduct in their actions as directions or officers. (S Corporations may consider the procurement of directors and officers insurance coverage in order to provide additional protection to directors and officers against individual liabilities.)
  • S Corporations are treated similar to partnerships for federal tax purposes and the “double taxation” of C Corporations is avoided. S Corporations require an affirmative tax election. Revenues and expenses are reported (not taxed) at the entity level through Form 1120S and passed through by Form 1120S-K-1’s and taxed at the member level on Form 1040, Schedule E.
  • For any entity offering an investment opportunity to more than 1 investor, federal and/or state securities laws may apply and may require certain disclosures or registrations in connection with such an offering. Please consult a licensed attorney for advice concerning your specific circumstances.