Subchapter S Corporation (S Corp)

Subchapter S Corporation (S Corp)

A Subchapter S Corporation, commonly referred to as an S Corp, is a special type of corporation that meets specific Internal Revenue Code requirements to be taxed under Subchapter S. An S Corp is designed to avoid double taxation on corporate income, allowing income, deductions, and credits to pass through to shareholders, who report them on their individual tax returns.

To qualify as an S Corp, a corporation must meet the following criteria:

1. Be a domestic corporation.
2. Have only allowable shareholders, which include individuals, certain trusts, and estates, but not partnerships or corporations.
3. Have no more than 100 shareholders.
4. Have only one class of stock.
5. Not be ineligible, which includes certain financial institutions, insurance companies, and domestic international sales corporations.

For example, if a small business elects S Corp status, its profits are not taxed at the corporate level. Instead, each shareholder reports their share of the corporation’s income on their personal tax returns, thus avoiding the double taxation that occurs with traditional C Corporations.