S corporations are common among small to medium-sized businesses, including family-owned businesses, professional services firms, and retail stores. S corporations are considered "pass-through entities," meaning their profits and losses are passed directly to the shareholders' personal tax returns. The structure helps avoid the double taxation that can occur with traditional C corporations when the company and shareholders are taxed separately.

S corporations can be attractive to investors due to their potential for tax savings, limited liability protection, and the ability to pass through profits and losses, which can also be beneficial for certain investment strategies.
Definition
What is an S corporation?
An S corporation, or S corp, is a type of business structure that combines elements of both a corporation and a partnership, allowing business income and losses to pass through to the individual tax returns of the company's shareholders, avoiding double taxation at the corporate and individual levels. To qualify for this status, a corporation must meet specific requirements, including being a small business.
To qualify as an S corporation, a business must be a domestic corporation, have no more than 100 shareholders, and have shareholders who are individuals, estates, or certain trusts -- not partnerships, corporations, or nonresident aliens. The corporation also must have only one class of stock and not be an ineligible type, such as a financial institution or insurance company.
S corporations have stricter reporting and compliance requirements than other business structures, such as limited liability companies (LLCs). There are limitations on the number and types of shareholders an S corporation can have, and they typically have a more structured management framework, including a board of directors and officers. While S corporations are similar to C corporations in terms of legal structure, offering liability protection to shareholders, they are distinct in their tax treatment.
Uses
What are S corporations used for?
S corporations are used as a business structure to avoid double taxation, rather than being taxed on business income at both the corporate and shareholder levels. S corps are attractive to small to medium-sized businesses because they can avoid the double taxation that traditional corporations (C corps) face, where the company is taxed on its profits, and then shareholders are taxed again when those profits are distributed as dividends.
Instead, S corporations pass the business' income, losses, deductions, and credits directly to the shareholders' personal tax returns, who then pay taxes on their share of the income at their individual income tax rates. This pass-through system can sometimes lead to a lower overall tax burden, especially for small to medium-sized businesses, since shareholders may be in a lower tax bracket than the corporate tax rate.
Like regular corporations, S corporations offer limited liability, meaning the personal assets of the shareholders are protected from business debts and liabilities. Creditors generally cannot pursue the personal assets of the shareholders to pay business debts, unless there is a personal guarantee.
Potential benefits
Potential benefits of S corporations
With an S corporation, the company's income is taxed at the shareholder level, not at the corporate level. S corporations can also help owners potentially reduce self-employment tax by splitting income into salary and distributions, with only the salary portion subject to payroll taxes.
S corporations can deduct business expenses, like salaries, wages, rent, utilities, and supplies, reducing taxable income and tax liability. Shareholders can deduct business losses on their personal tax returns, up to their basis in the stock and any loans made to the entity. These entities are not subject to the accumulated earnings tax, which can be a concern for C corporations.
S corporation ownership interests can typically be transferred without major tax consequences or legal complexities. These structures have a perpetual existence, meaning they can continue to operate even if ownership changes, which can be advantageous for succession planning. This status can also help establish credibility with potential customers, employees, suppliers, and investors.
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The bottom line
The bottom line on S corporations
S corporation status may not be the best choice for all businesses, especially those that anticipate significant losses or those that need to raise large amounts of capital. S corporations are generally not designed to be publicly traded, since they are typically enterprises with limited shareholder numbers. However, potential tax savings through pass-through taxation, limited liability protection, flexibility in the transfer of ownership, and perpetual existence can make them a popular choice for small businesses.