An S corporation combines the benefits of a partnership and a corporation.
In the United States (US), the Subchapter S corporation, also known as an S corporation or S corporation, is a type of small corporation that combines the advantages of a partnership and a corporation. This type of corporation is called a Subchapter S corporation because it qualifies to be taxed under Subchapter S of the U.S. Internal Revenue Code. This allows the Subchapter S corporation to enjoy the federal tax benefits of a partnership while also enjoying the limited personal liability that protects corporations.
If a Subchapter S status is not suitable, a business can easily transition to a different corporation status.
By qualifying for Subchapter S taxes, a Subchapter S corporation avoids having to pay the corporate tax that most other corporate structures must pay. Instead of being double taxed, once at the corporate level and then at the shareholder level, Subchapter S corporations are legally allowed to pay taxes only on shareholder income. A business owner or shareholder under a Subchapter S structure can retain significant profits by avoiding taxes at the corporate level. Another way to eliminate corporate taxes is to structure a business under a partnership, but this leaves a business without the limited liability benefits of a corporation, which means that if the partnership went under or was sued, the personal assets of the owners they could be the target.
Under a Subchapter S corporation, the personal assets of the shareholders are protected by the corporate structure, which exists as its own entity, but the shareholder is still free to enjoy all the tax benefits of the partnership. Some US states also have an equivalent tax plan for this type of corporate structure, although rules and availability vary by state. As a result, a professional legal and financial consultation is recommended to assist in the process, as well as to assess whether a Subchapter S classification is appropriate for a given business.
The requirements listed to qualify as a Subchapter S corporation can be stringent. In general, no more than 100 shareholders can participate in the company. Shareholders must meet certain eligibility requirements, and there are also limits on what class of shares a Subchapter S corporation can issue. A company may initially be structured under a Subchapter S classification, only to decide that its growth model is not suitable. for that kind of corporate structure. Fortunately, with some money and the right legal advice, a business can easily transition to a different corporation status if a Subchapter S status isn’t right. On the other hand, larger corporations with more than 100 shareholders may have a more difficult time converting to a Subchapter S structure.