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What Is an S Corporation? - Definition, Requirements, Advantages & Examples

What Is an S Corporation? - Definition, Requirements, Advantages & Examples
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  • 0:04 What Is an S Corporation?
  • 1:30 S Corporation Requirements
  • 2:09 S Corporation Advantages
  • 3:38 Lesson Summary
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Lesson Transcript
Instructor: Tara Schofield
This lesson explains what an S corporation is and discusses the advantages of an S corporation. You'll also learn about the requirements of an S corporation and see some examples.

What Is an S Corporation?

An S corporation is one of the types of business entities that the Internal Revenue Service recognizes as a legitimate form of a business, and it can vary in size from a couple of owners to as many as 100 owners or shareholders.

Unlike partnerships and sole proprietorships that require the owners to be liable for the expenses and payables of the business, the owners of S corporations aren't personally liable if the company cannot cover its expenses, so creditors won't take personal assets if the company cannot pay its debts. The only personal risk a shareholder has is losing any money invested in the business when purchasing shares. This benefit is similar to one of the many types of protection that a C corporation offers.

Another difference between an S corporation and other types of businesses lies in taxation. S corporations don't pay federal income tax as a business. Any income or loss from the business operations is reported on the federal tax returns of its shareholders. The business itself doesn't report federal income tax; therefore, the company avoids double taxation, which is a situation in which the company pays federal taxes and the shareholders or owners also pay federal income tax on the money earned from the company. This distinction makes an S corporation very appealing to business owners because there can be similar tax advantages to the company as if it were a sole proprietor or partnership, rather than being taxed under the corporate tax structure.

S Corporation Requirements

There are many requirements to be labeled as an S corporation. The main requirements to be an S corporation include the following rules:

  • There must be a maximum of 100 shareholders. These can be individuals, estates, and certain types of trusts.
  • All shareholders must be U.S. residents who understand the corporation is an S corporation.
  • The corporation must be registered in the United States.
  • S corporations cannot be owned by other entities, such as C corporations, limited liability companies, partnerships, other S corporations.
  • There can be just one class of stock.

S Corporation Advantages

There are many benefits to being labeled and structured an S corporation that appeal to business owners. Some of the main benefits of being an S corporation include the following:

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