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What is the Difference between an S Corporation and a Corporation?

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Question: What is the Difference between an S Corporation and a Corporation?
Answer:

In brief, an S Corporation is a special type of corporation. Here are the characteristics of a corporation:

  • Legal Entity
    A corporation is set up as a separate legal entity from its shareholders (owners). In other words, the activities of the corporation (sales, expenses, assets, liabilities} are totally separate from the personal activities of the shareholders and owners.

  • Liability
    Because the activities of the corporation are separate, the liabilities of the corporation cannot be transferred to the shareholders. This separation, sometimes called a "corporate shield," protects the shareholders from the debts and lawsuits of the corporation.

  • Taxes
    A corporation pays taxes at the corporate income tax rate.

An S Corporation is a special kind of corporation, which allows the protection against liability of a corporation but which pays taxes at the individual tax rate. Here is how the Sub-S Corporation works:

  • Setup
    The corporation is incorporated (set up as a corporation).

  • Election
    Within a specified time after incorporation, and if certain eligibility requirements are met, a corporation can file a form to "elect" Subchapter S status.

  • Taxes
    The s corporation's profits then are taxed at the tax rate of the individuals who own the corporation, instead of the corporate tax rate.

In conclusion, an s corporation is a corporation which has the benefit of liability protection like other corporations, but the tax benefit of the personal tax rate.

Back to All About S Corporations

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