Legal Definitions - Subchapter S corporation

A Subchapter S corporation, also known as an S corporation, is a type of corporation that is taxed differently from a regular corporation. In an S corporation, the profits and losses are passed through to the shareholders, who report them on their individual tax returns. This means that the corporation itself does not pay taxes on its profits.

For example, let's say that an S corporation has three shareholders. In a given year, the corporation makes a profit of $100,000. The profit is divided among the shareholders based on their ownership percentage. If one shareholder owns 50% of the corporation, they would report $50,000 of income on their tax return.

S corporations are different from regular corporations, which are also known as C corporations. In a C corporation, the corporation pays taxes on its profits, and then the shareholders pay taxes again when they receive dividends. This is known as double taxation.

There are some restrictions on who can form an S corporation. The corporation must have fewer than 100 shareholders, and all of the shareholders must be individuals or certain types of trusts. The corporation can only have one class of stock, which means that all shareholders have the same rights and privileges.

S corporations are often used by small businesses and family-owned companies. They are also popular with companies that want to avoid double taxation. However, they are not suitable for companies that want to raise money from venture capitalists or other institutional investors.