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

By Jean Murray, About.com

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

Answer:

In brief, an S-Corporation (sometimes called a "Subchapter-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 activities of the shareholders.

  • 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.

A Subchapter-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 established as a "regular" corporation, as described above.

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

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

What makes a corporation eligible to elect sub-chapter s status?

  • The corporation must be incorporated in the U.S.
  • No shareholder can be a nonresident alien individual.
  • All shareholders must be individuals (not other corporations).
  • There cannot be more than 100 shareholders.
  • There are other restrictions on the ability of a corporation to elect S-corporation status. See the Tax Guide for more details.

How and when do I elect S-Corporation status?

  • You must use IRS Form 2553 to file the election.
  • You must file the election form no later than:
    • Bythe 16th day of the 3rd month of the corporation's tax year,
    • Before the 15th day of the 2nd month of a tax year lasting 2-1/2 months or less,
    • At any time during the tax year before the tax year the election is to take effect.
    You may also file a late election.

If you want to file a Sub-chapter S election, please see your tax professional for help.

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