Business, Legal & Accounting Glossary
An S corporation is a corporation that for tax purposes chooses to pass all profits, losses, credits, and deductions on to its shareholders (i.e. pass-through entity). S corporation shareholders then report the profits, losses, credits, and deductions on their personal income taxes (i.e. by filing the Schedule K-1 sent to them by the S corporation) which are taxed at their individual rate. By passing on profits to shareholders, S corporations avoid double taxation while still providing shareholders with limited liability protection. Although the S corporation does not pay taxes on its corporate income, the S corporation is required to file Form 1120S with the IRS (i.e. U.S. Income Tax Return for an S Corporation) and prepare Schedule K-1 for its shareholders (i.e. Partner’s Share of Income, Deductions, Credits, etc.). Further, an S corporation still has to pay taxes on passive income and some built-in gains (i.e. BIG tax) when a C corporation elects to convert to an S corporation. An S corporation must be incorporated under United States laws, have no more than 100 shareholders, have only individuals, estates, and certain trusts as shareholders, and have only one class of stock to qualify as an S corporation. Additionally, insurance companies, financial institutions, and domestic international sales corporations are prohibited from becoming an S corporation. A corporation submits, and all shareholders sign, Form 2553 Election by a Small Business Corporation to become an S corporation. Such election is in effect until it is revoked or terminated.
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This glossary post was last updated: 5th February, 2020