S-Corporation FAQs

What, exactly, is an S corporation?

In a nutshell, an S Corporation is a corporation, partnership or limited liability company that's made an S election with the IRS. And an S Corporation doesn't have to actually be a corporation. It needs only to be what the Internal Revenue Service considers an eligible entity.

You should therefore think about an S corporation not as a "legal entity" but rather as a tax accounting classification.

Just to go into this definition a bit further, the S election tells the IRS that the business wants to be treated under the rules of Subchapter S of the Internal Revenue Code.

While there are many complicated provisions in Subchapter S, the basic feature of an S corporation is easy to understand: S corporation taxable income or S corporation tax deductible loss is allocated to the S corporation owners based on their ownership percentages.

An S corporation that makes, say, $100,000 in profits pays no income taxes on that profit. Instead, the shareholders of the S corporation include the profit on their returns.

If two shareholders equally own an S corporation that makes $100,000, for example, each shareholder adds $50,000 of income to his or her return and then pays the tax on that $50,000 profit from the S Corporation.