Most business owners have two main goals in mind when selecting a structure for their company: shielding their personal assets from corporation claims (also known as limited liability) and having company profits taxed on their individual tax returns. An S-Corporation is one structure type that many business owners find that addresses and solves these two issues. An S-Corporation, also known as an S Corp, is a corporation that is owned by shareholders. An S-Corporation pays no income tax, can avoid double taxation, and shareholders pay taxes on their dividends. An S- Corporation is a unique type of corporation created through an IRS tax election. In order to turn a business into an S- Corporation, the company must first be chartered as a corporation in the state where it would become an S-Corporation.
The ability to have profits and losses pass through to an owner’s personal tax return is the main thing that sets apart S-Corporations from traditional corporations. The downside to this though can be just that—only the owners are taxed and not the corporation itself. It’s also important to keep in mind that an owner must compensate him or herself with earnings that are considered fair market value if they work for the corporation, or the IRS might categorize additional corporate money as wages.