Much like a “C” corporation in that it is also its own legal entity, protects its shareholders from legal liability, and requires a certain amount of yearly maintenance. However, an “S” corporation allows shareholders to claim their share of the corporation’s income directly on their personal tax return, avoiding a double tax situation. However, an “S” corporation is generally limited in the amount of shareholders.
- Unlike C Corporation, Income is taxed only at the shareholder level, not at the corporate level, avoiding double-taxation.
- In many cases, an S Corp offers owners protection from lawsuits or responsibility for the debts of the corporation.
- S corporation does not have double taxation: the corporation doesn’t pay income tax; the owners pay income taxes based on their respective shares of the profits.
- Shareholders that control and own a significant amount of or majority of the voting stock have a dominant voice in the management of the business.
- Cannot have more than 100 shareholders, which reduces the chances of raising capital.
- Strict Qualification Requirements: Only individuals, certain estates and trusts, certain tax-exempt organizations can be shareholders.