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.
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.
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:
The corporation is incorporated (set up as a corporation).
Within a specified time after incorporation, and if certain eligibility requirements are met, a corporation can file a form to "elect" Subchapter S status.
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.
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