Subchapter S Corporation (S Corp)

What is a Subchapter S Corporation (S Corp)?

A Subchapter S corporation, also known as an S corp, is a specific type of corporation; the other type is a Subchapter C corporation. In a nutshell, an S corp provides all the advantages of a corporate business structure while allowing the profits and losses to pass through to the shareholder(s), just as in an LLC or partnership.

A corporation is a form of business that is owned by its shareholder(s) and which assumes liability for the actions and finances of the business – the shareholders cannot be held responsible. Being able to shift liability away from the owner and onto the business itself is a major advantage.

Eligibility

Corporations can be established by individuals or companies. Some of the restrictions of an S corp include:

  • No more than 100 shareholders
  • Only U.S. citizens can be shareholders
  • Can only issue common stock

Pros

For many years, the Subchapter S corporation was the preferred business structure for small business owners because they provide the liability protection of a corporation with the pass-through taxation of LLCs and partnerships. Other advantages include:

  • The existence of the company does not expire, as an LLC’s can
  • One person is able to form a Subchapter S corporation
  • Ownership interests are transferable
  • Only the wages of an employee are subject to the 15.3% self-employment tax, other benefits and bonuses are excluded

Cons

There are disadvantages, too, however, which include:

  • The need to create and file the same paperwork as a Subchapter C corporation, such as Articles of Incorporation, keeping corporate minutes, scheduling board of director meetings and shareholder meetings, and providing a way for shareholders to vote on corporate issues.
  • The additional paperwork and tax filings include some or all of the following on a regular basis:
    • Income Tax Return for S Corporation
    • K-1: Shareholder's Share of Income, Credit, Deductions
    • Form 4625 Depreciation
    • Employment Tax Forms
    • Form 1040: Individual Income Tax Return
    • Schedule SE: Self-Employment Tax
    • Form 1040-ES: Estimated Tax for Individuals
    • Forms 2553, 941 and 940
  • Can only issue common stock to shareholders, which is less desirable to potential investors.

How to Form

To create a Subchapter S corporation, businesses must first form a corporation and then file Form 2553 to elect to change it to a Subchapter S.

Start your free 14-day trial today!