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An S corporation, also known as an S corp, is a type of business structure that allows the company to pass through its taxable income, credits, deductions, and losses directly to its shareholders. This means that the company itself does not pay corporate taxes, but instead the shareholders are liable for the taxes on their share of the company's income. This is different from a C corporation, which is subject to double taxation (once at the corporate level and again when profits are distributed to shareholders). S corps are also referred to as "pass-through entities" and are an alternative to the limited liability company (LLC) for small businesses with fewer than 100 shareholders. They offer the benefits of limited liability protection for shareholders, like an LLC, and the tax benefits of a pass-through entity, like an S-Corp. IRS Requirements for S Corporations
To qualify for S corporation status, a business must meet certain requirements set by the Internal Revenue Service (IRS). These include being domestically incorporated, having only one class of stock, having no more than 100 shareholders, and meeting certain shareholder eligibility criteria such as being individuals, certain trusts and estates or certain tax-exempt organizations. However, partnerships, corporations and nonresident aliens are not eligible to be shareholders in an S corporation. In summary, a business must meet specific criteria set by the IRS to qualify for S corporation status, which include domestic incorporation, one class of stock, and limited shareholders who meet certain eligibility criteria.
S corporations offer small business owners the benefits of both corporations and partnerships. They provide limited liability protection, separating the business's assets from the owner's personal assets, as well as the tax benefits of a pass-through entity, similar to a partnership. S-corps do not pay corporate income and earnings taxes and can assist owners in avoiding self-employment tax if their income is structured as salary or stock dividends. In summary, S corporations offer a unique combination of corporate protection and tax benefits, making them an attractive option for small business owners.
A C corporation (or C-corp) is a legal structure for a corporation in which the owners are taxed separately from the entity. Additionally, C corporations, the most common type of business, are subject to corporate income taxation. Profits from the business are subject to taxation at both the corporate and individual levels, resulting in double taxation.
C-corporations are comparable to S corporations and limited liability companies (LLCs), which also segregate a company's assets from its shareholders but have distinct legal structures and tax treatment. The B-corporation (or benefit corporation) is a newer type of organization that differs from C-corps in terms of purpose, accountability, and transparency, but not in terms of taxation.
The formation of a C corporation is comparable to the formation of other forms of commercial entities. These are the steps involved in establishing one:
A limited liability company (LLC) is a corporate structure in the United States that shields its owners from personal accountability for the firm's debts and liabilities. Limited liability corporations are hybrid entities that combine aspects of a corporation with those of a partnership or sole proprietorship.
While the limited liability element of an LLC is comparable to that of a corporation, the possibility of flow-through taxes to the members of an LLC is a characteristic of a partnership and not an LLC.
Limited liability companies (LLCs) are crucial business formation legal structures. Limited liability indicates that the assets and liabilities of the firm are kept separate from the owners' personal holdings and liabilities. If a company declares bankruptcy, creditors cannot pursue the owners' personal assets, only those of the firm. Additionally, LLCs have various advantageous characteristics, including streamlined taxation and an easy formation process. This is one reason why LLCs are the most frequent business structure in the United States.
Although the regulations for LLCs differ from state to state, there are a few commonalities. The first step for owners or members is to select a name for the organization.
The organization's articles of incorporation can then be recorded and filed with the state. These articles outline the rights, powers, responsibilities, and liabilities of each member of the LLC. The paperwork also contain the names and addresses of the company's members, its registered agent's name, and a mission statement.
The filing of the articles of incorporation is accompanied by the payment of a fee to the state. Obtaining a federal employer identification number also necessitates the submission of extra paperwork and payments (EIN).