How to Avoid Double-Taxation
“S corporation” stands for “Subchapter S corporation”, or sometimes “Small Business Corporation." It’s a special tax status granted by the IRS that lets corporations pass their corporate income, credits and deductions through to their shareholders.
An S-Corp is not itself a business entity like an LLC or a corporation, but rather a special tax designation. You can’t ‘incorporate’ as an S corporation. To become one, you have to apply to the IRS.
Generally speaking, S corporations don’t pay federal taxes. Instead, the company’s individual shareholders split up the income (or losses) amongst each other and report it on their own personal income tax returns.
The S corporation status lets businesses avoid double taxation, which is what happens when a business is taxed at both the corporate level and business owner level. In the absence of corporate tax, the S corp “tax rate” is wherever the business owner’s personal income level falls on the tax bracket.
The tax benefits of S-Corporations are great; but always be sure to follow any formalities that go along with your particular business entity set-up as well. For more on that, please watch my video on piercing the corporate veil.