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S CORPORATION

Corporations that meet certain requirements can elect an S Corporation status with the IRS. This federal tax status enables companies to "pass through" their taxable income or losses to owners/investors in the business, according to their ownership stake in the business.

By default, companies that do not specify a tax status with the IRS are considered to be C Corporations - which means that they will be taxed as a C Corporation. On the other hand, by electing S Corporation status, a corporation can eliminate the disadvantage of "double taxation" of corporate income and shareholder dividends associated with the C Corporation tax status.

Say a corporation makes $300,000 in a given year - if it is an S Corporation, the business itself will not be taxed for that amount; instead, the company's shareholders will be required to pay taxes according to their share of the company. In this scenario, if the company has three shareholders, each with an equal share of company stock, each shareholder will pay taxes on $100,000.

If the C Corporation makes $300,000 in a year, then the company would pay taxes at the current federal corporate tax rate of about 34%. If the remaining profits of $198,000 are distributed to the three shareholders as dividends, each shareholder will pay taxes on $66,000 in dividend income at the current federal dividend tax rate of 15%.
S Corporation Advantages For Taxable Amount
S Corporations, like other types of corporate entities, also keep owners' personal assets safe from company debt and judgments against the business.

In short, the S Corporation status offers the following advantages:

    Limited liability: Company directors, officers, shareholders, and employees enjoy limited liability protection
    Pass-through taxation: Owners report their share of profit and loss on their individual tax returns
    Elimination of double taxation of income: Income is not taxed twice; once as corporate income and again as dividend income
    Investment opportunities: The company can attract investors through the sale of shares of stock
    Perpetual existence: The business continues to exist even if the owner leaves or dies Once-a-year tax filing requirement (vs. quarterly for a C Corporation)