Due to both the double taxation of C-corps and the administrative hassle of setting up and running a C-corp, the government introduced subchapter S corporations, or S-corps. For many small business owners, an S-corp, with its simplified rules, makes much more sense than the older C-corp.
Since an S-corp has the same ability as a C-corp to protect its owners from liability, its biggest advantage is allowing owners to treat their business as a pass-through entity for tax purposes. This tax structure, which is similar to a partnership, allows the owners to report the income or losses directly on their tax return without experiencing the double taxation that comes with owning a C-corp.
There are limits on S-corps, though. The S-corp cannot have more than 100 shareholders, all of whom must be U.S. citizens, estates, or trusts, which limits its ability to raise additional money from new investors. Other corporations, limited partnerships, and multi-member LLCs are also not allowed to be shareholders, even if based in the U.S. Additionally, S-corps are not permitted to have more than one class of stock (such as common and preferred stock) and must hold an annual shareholders’ meeting.
Business Entity
Characteristics
Sole Proprietorship
• Individual owns business
• Not set up as a separate entity
• Owner personally liable for business debts
General Partnership
• All partners are general partners and are personally liable for the business
• Partners share in control of the business
• “Pass through” profits and losses to shareholders’ personal tax returns
• Date of termination stated in partnership agreement
