S Corporation

Brief Definition

An S corporation is a special type of corporation in the US that meets specific Internal Revenue Code requirements. The main benefit of an S corporation is that it allows profits to be passed directly to shareholders without being subject to corporate income tax.

Further Explanation

An S corporation is a special type of corporation in the US that meets specific Internal Revenue Code requirements. The main benefit of an S corporation is that it allows profits to be passed directly to shareholders without being subject to corporate income tax. This avoids the “double taxation” that regular (C) corporations face.

Example:
A small business with three owners that elects to be treated as an S corporation. The business earns $300,000 in profit. Instead of the corporation paying taxes on this profit, the $300,000 is divided among the three owners, who each report their share ($100,000) on their personal tax returns and pay taxes at their individual rates.