An S Corporation is a corporation under the laws of a state that is taxed like a partnership. Essentially, it acts just like a normal C corporation with one big exception. The main difference is that all of the profits and losses are not taxed at the corporate level. The profits and losses flow directly to the shareholders and are taxed on their respective tax returns on a pro rata basis depending on the ownership percentage.
To create an S corporation you first need to set up a corporation. You may want to consult an attorney on that one as there is paperwork to file and which state you want to incorporate in may be an issue to you. To become an S corporation the business needs to file an election where the shareholders and the officer-in-charge of the business agree to the federal requirements of being an S corporation. There are certain limitations about which corporations can make the election. Most of the requirements are focused on who the shareholders can be. For example there can only be 100 and generally they have to be individuals or certain trusts/estates.
The biggest benefit is the avoidance of the double taxation that is inherent in C corporations. The biggest drawback is probably the limitations on who can own the stock, no C corporations, partnerships, or foreign individuals. Also, there can only be one class of stock which can limit certain ownership arrangements.
The S Corporation structure is great for small businesses that provide services like contractors whether that be in the plumbing, technology, medical, or advertising professions. It can over great tax savings with a small increase in administrative costs.
That is a quick summary. If you are now scratching your head and wondering ‘what is a C corporation,’ well that is a topic for another time. Enjoy, and remember these posts are for informational purposes only and are not tax advice. If you have questions please feel free to contact me.