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S corporation (S corp)

An S corporation (S corp) is a United States business that has filed for that status on the Internal Revenue Service form 2553. 

Like a C corporation, the S corp is considered a separate entity under the law. However, all of the profits and losses of an S corporation pass through to shareholders and must be reconciled on their individual tax returns. Shareholders are required to pay themselves what the IRS considers “reasonable compensation.” Failing that, the IRS can reclassify corporate earnings as wages 

The benefit of the S corp is that double taxation cannot occur, as it does for the C corporation. An S corp may also file for status as a limited liability company (LLC), which protects the private assets of shareholders.

To file as an S corp, a business must first register as a standard corporation. Once the corporation exists, all shareholders must sign form 2553. The S corp is defined under Subchapter S of the United States tax code, just as the C corp is defined under Subchapter C.

See also: business structure, sole proprietorship, partnership

This was last updated in December 2015

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