An S Corporation receives the benefit of being treated like a partnership

An S and C corporation are essentially the same type of entity except for how they are taxed. C corporations will pay income taxes on their own return. In most small C corporations the owners are paid out through salaries and fringe benefits, leaving no corporate profit and therefore no corporate taxes. However, if the C corporation pays dividends, then it will be taxed as part of corporate profit. This is referred to as double taxation.

On the other hand, an S corporation does not pay taxes itself. Any profits are paid on the individual level. This is referred to as pass-through taxation. However, the S corporation has additional restrictions on who can be a shareholders, the amount of shareholders, and the classes of stock.

Making the S corporation election

To save on taxes, C corporations and single member LLC’s are encouraged to make the S corporation election. Multi-member LLC’s and partnerships will receive pass-through tax treatment by default. The election should be made at the time of business formation. Waiting to make an election can cause non-recognition of the S corporation status which will have negative consequences for the business’s tax liability. Most importantly, the election is more then just completing a form. The proper language has to be included in the Articles as well.

To understand how an S corporation election can save you money, speak to a one of our attorneys by calling 800-743-9900 or visit our website today!