An S Corporation ("S Corp.") is an ordinary business corporation that has elected to be taxed under Subchapter C of the Internal Revenue Code. It is not taxed on its earnings as a corporation, but instead its earnings are passed through to its shareholders for tax purposes.
However, an S Corp. has certain limits on the number of shareholders it may have and who may be shareholders, is limited to one class of stock and has to operate under a group of other rules.
S Corps have the following advantages:
Losses can be passed on to the investors,
Two levels of taxation can often be avoided,
There are no accumulated earnings tax, and
There is limited liability protection.
Conversely, the S Corp. suffers from the following drawbacks:
At-risk limitation, basis limitation on losses, passive loss limitations and investment interest limitations are all in effect,
Individual alternative minimum tax consequences may arise, and
The S Corp. may not be brought forward in a public offering to raise capital.
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