Overview of S Corporations
The S corporation features the same limited liability protection as the
C corporation. Business owners select S corporation status to avoid the
double taxation of a C corporation. Only the S corporation's shareholders
are subject to taxes (unlike a C corporation, the S corporation pays no
tax). Because S corporations are taxed as proprietorships or partnerships,
many people erroneously think that the S corporation similarly loses the
limited liability feature of the C corporation. Consider only tax factors
when deciding whether to become an S or C corporation. Leave this decision
to your accountant.
It is easier to lawsuit-proof the stock ownership of a C corporation.
S corporation shares must be owned by natural persons, or disregarded
entities, such as a single member LLC. C corporations, limited partnerships,
multi-member LLCs and other legal entities — with few exceptions
— cannot own shares of an S corporation. You then have fewer options
to protect your S corporation shares from personal creditors. However,
you may protect S corporation shares in several ways. The S corporation
has other key features:
— The S corporation has pass-through taxation. Corporate profits are taxed
only once when they pass through to the shareholders. The S corporation
is thus taxed as a proprietorship or partnership. The corporation itself
is not taxed, its owners are.
— The S corporation is limited to 100 shareholders. Its shareholders must
all be U.S. citizens or residents.
— The S corporation must be organized under U.S. law, have only one class
of stock and not own 80% or more of the stock of another corporation.
S corporation status is granted by the IRS. It is possible to change from
C to S corporation status, within certain rigid IRS guidelines.
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