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.
Yes, You Can Lose Everything!
You may think that your wealth is safe and that you don't need protection. But don't delude yourself and accept reality — for every 60 minutes you spend making money, spend 60 seconds thinking about how to protect it!