What Is a Chapter S Corporation?

A Chapter S corporation is a business enterprise that elects to become taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. A Sub S taxation scheme provides for pass through treatment of corporate income.

Double Taxation

According to SmallBusinessLawFirms.com, the income from a regular corporation becomes subject to double taxation. Earnings or profits are taxed at the corporate level and then taxed again if the corporation distributes any dividends to its individual shareholders.

Pass-Through Treatment Of Income

Earnings from a Chapter S corporation are taxed only once. The corporation passes through its income to individual shareholders and they report the income on their individual federal income tax forms.

S Corp Similar To A Partnership

Since the profits or losses from corporate operations pass through to individual shareholders directly, an S Corp shares some of the same characteristics of Partnerships, says SmallBusinessLawFirms.com.

Limited Liability

Although an S Corp is taxed in a similar manner as a Partnership, its shareholders still enjoy the protection of limited liability.

Qualifications

In order to qualify for status as an S Corp, the company can only have one class of stock and it cannot have more than 100 shareholders.

Allocation Of Income and Losses

Income or losses must allocate to individual shareholders in proportion to their respective interest in the business.

References

• SmallBusinessLawFirms.com: Business Sub Chapter S Corporation: Advantages, Disadvantages and Election