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S Corporation

S Corporation
An S corporation, also known as an S corp, is a type of business entity in the United States that provides the limited liability protection of a corporation while offering pass-through taxation like a partnership or sole proprietorship. The "S" designation refers to Subchapter S of the Internal Revenue Code.

5 Key characteristics of an S corporation include:

  1. Pass-through taxation: Unlike a C corporation, an S corporation does not pay federal income taxes at the corporate level. Instead, the profits and losses "pass through" the corporation and are reported on the individual tax returns of the shareholders. This avoids double taxation.

  2. Limited liability protection: Like a C corporation, shareholders of an S corporation generally have limited personal liability for the company's debts and obligations. Their liability is typically limited to their investment in the corporation.

  3. Ownership and shareholders: An S corporation can have a maximum of 100 shareholders, and they must be U.S. citizens or residents. Shareholders can be individuals, certain trusts, or certain tax-exempt organizations. Other corporations or partnerships cannot be shareholders of an S corporation.

  4. Restrictions on stock classes: S corporations are limited to having only one class of stock. This means that all shareholders must have equal rights and privileges in terms of voting and distributions.

  5. Formalities and compliance: Although not as extensive as C corporations, S corporations still have certain formalities to comply with, including adopting bylaws, holding shareholder and director meetings, and maintaining corporate records.

S corporations are often favored by small and family-owned businesses due to the pass-through taxation feature, which can provide potential tax benefits. However, they may not be suitable for businesses that plan to attract investors or issue different classes of stock. It is important to consult with a qualified tax advisor or attorney to determine if an S corporation is the appropriate choice for your specific circumstances.