What Is an S Corporation (S Corp)?

An S Corporation (S Corp) is a U. S. business entity that enables a corporation to choose a special federal tax treatment. This way, typically the corporation’s earnings, losses, deductions, etc., and credits are passed on to its shareholders, and they are responsible for being taxed personally rather than being taxed at the company level. This arrangement can be really beneficial to eligible businesses since they can skip double taxation, a major disadvantage of C corporations.

The term S&S Corp is sometimes used informally, but the correct legal and tax term is S Corporation or S Corp.

How Does an S Corporation Work?

An S Corp stays the same as a regular corporation by state law, but it elects to have a treatment for its taxes that resembles an S corporation. That means, as a usual case, corporations pay their income tax on the business income to the IRS; the income-taxable items, though, are passed through to shareholders and are disclosed on individuals’ tax filings.

With eligible business owners, an S Corp may, in a way, permit a mix of salary and stockholder distributions, based on tax rules, for compensation.

What Are the Benefits of an S Corp?

The S Corporation type has a few benefits:

• Flow-through taxation: Shareholders typically pay taxes on their portion of the company’s income at their personal tax rate instead of the company paying taxes.
• Tax advantages: With the right setup, distributions might be treated more favourably for taxes than wages.
• Owners have limited liability: In most cases, shareholders are shielded from business liabilities akin to other corporate forms.
• A recognised corporate structure: An S Corp may be used as a legal entity to lay out how the owners’ duties are divided, what decisions need to be made, etc.

S Corp vs. C Corp

The biggest difference is generally how the business is taxed. A C corporation is typically subject to corporate income tax, with shareholders potentially paying tax again on certain dividends. An S Corp generally uses pass-through taxation.

However, S corporation status comes with eligibility restrictions. For example, there are limits on the number and type of shareholders, and certain corporations and nonresident aliens generally cannot be shareholders. These restrictions can make a C corporation more suitable for businesses seeking venture capital or planning significant equity fundraising.

Want Help With Your Finance and Accounting Operations?

Maintaining accurate bookkeeping, payroll records, financial statements, and tax-related information is essential for an S Corp. Atidiv helps businesses streamline accounting, financial reporting, finance operations, and back-office processes.

Talk to an Atidiv expert to explore how Atidiv can support your finance and accounting operations.