A hybrid form of businessownership, the S Corporation is a cross between a partnership and a corporation. "S status" is a popular option for businessowners who plan to issue company stock to 100 or fewer shareholders, and elect to have corporate earnings taxed directly to the shareholders rather than to the corporation.
"S" corporations pass all income and losses to their shareholders. The name refers to Subchapter S of the Internal Revenue Code (IRC), which provides an incentive for new business start-ups. Since new businesses tend to lose the most money in their early years, S corporation shareholders/employees can use those losses to offset other income.
Characteristics
- Must have 100 or fewer shareholders.
- Typically, states require the filing of detailed articles of incorporation.
- Shareholders' liability is limited to their shares of the business.
- Shareholders who own more than two percent of an S corporation are not considered to be employees and are ineligible to receive tax-free disability or group term life insurance benefits.
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