S Corporation

Always seek out information pertaining to the applicable jurisdiction before you make a decision.

In the United States, an S corporation is a closely held business entity that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. Generally speaking, S Corporations do not pay income tax. Instead, profits and losses are divided among and passed through to the shareholders, and each shareholder is required to report their income or loss on their own individual income tax return. The S Corporation can thus be described as being a bit like a standard corporation (C Corporation) and a bit like a partnership.

The S Corporation is an attractive option for small business owners who want to attain the limited liability of the corporation, but without forming a standard C Corporation and adhering to those tax rules.



How many shareholders?

Previously, an S corporation could not have more than 35 different shareholders. This was changed by the Small Business Job Protection Act of 1996. Nowadays, S corporations are allowed to have a maximum of 100 different shareholders.

Owner limitations

S corporation stock can only be owned by individuals, estates, certain trusts, and certain tax-exempt organizations (including qualified pension plans).

Common stock only!

Unlike a C corporation, the S corporation can only issue common stock.


The S corporation is subject to many of the same requirements as the C corporation. The S corporation must for instance hold directors and shareholder meetings, allow shareholders to vote on major decisions, and keep corporate minutes.

An S Corporation without inventory is however allowed to use the cash method of accounting. This is easier than the accrual method that C Corporations must use. With the cash method, income is taxable when received and expenses are deductible when paid.

Forming an S corporation

Forming an S corporation is similar to forming a C corporation, and considerably more tasking than forming a partnership. You must for instance file articles of incorporation to create an S corporation.