Instead, the profits are divided among the shareholders, according to the number of shares held by each shareholder.Įach shareholder will then need to report his or her share of the profits on their individual Form 1040, along with Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc.
Unlike the C corp., no corporate tax is assessed on any profits reported on Form 1120S. This is known as “double taxation."Īn S corporation is required to file Form 1120S, U.S.
Therefore, the profits are taxed once to the corporation, then taxed a second time to the shareholders if any profits (dividends) are distributed to the shareholders. If any portion of those profits are passed on to the shareholders as dividends, each shareholder will need to report his or her share on their individual Form 1040, along with Schedule B, Interest and Ordinary Dividends. Any profits will be taxed at the corporate tax rate. status is avoiding what is commonly called “double taxation."Ī C corporation is required to file Form 1120, U.S. What Are the Benefits of Electing S Corp. In order to have it taxed as an S corp., you need to notify the IRS that you are choosing, or “electing," to have it taxed as an S corp. If you organize your business as a corporation and do nothing else, it will be taxed as a C corp. A corporation using the Subchapter S method is commonly called an “S corporation," an “S corp.," or a “Sub S corp." What Is an S Corp. The provision of the IRS regulations that covers this method of taxation is Subchapter S of Chapter 1 of the Internal Revenue Code. For example, the corporation cannot have more than 100 shareholders and must be a closely held corporation (i.e., one that does not have publicly traded shares). Not all corporations can file for S corp. The shareholders then report the income on their individual income tax returns. The corporation itself does not pay any tax, but the profits are passed on to the shareholders. is a corporation that is taxed like a sole proprietorship (if there is only one shareholder) or a partnership (if there are two or more shareholders). It can be taxed as either a C corporation (or C corp.), or an S corporation (or S corp.). If you have organized your business as a corporation, you have a choice as to how your business will be taxed by the Internal Revenue Service (IRS).
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