S Corporation What Is It?

For many small businesses, the S corporation is the business entity of choice. The S in S corporation refers to a tax designation. All corporations are created the same way under state law. A small business must then chose a tax status, to wit, C, S or non-profit. Important issues concerning S corporations are covered in this article.

C Corporation v. S Corporation

Federal tax laws automatically consider every corporation to be a C designation. A small business, however, may elect to be designated as an S corporation by filing IRS form 2553. The election must be made prior to the tax year in which it is going to be effective. All shareholders must sign the election.

A C corporation stands alone for tax purposes. It must file tax returns and pay taxes on profits. Profits and losses are reported on the corporate tax return and do not pass through to shareholders. C corporations can elect any calendar month as the end of their fiscal year.

An S corporation is a pass through entity for tax purposes. It does not file a tax return for the purpose of paying taxes, but does file information returns. All profits and losses are passed through to the...