When you establish a corporation, you have a number of decisions to make. One of them relates to the tax treatment of the entity. When you set up a corporation, it will ordinarily be treated as a C corporation, which is a separate entity for tax purposes, paying taxes on its earnings, and distributing taxable dividends to shareholders. In some circumstances, shareholders may wish to forgo this treatment, and have all of the corporations earnings flow directly to them in the year they are earned. The decision is not a simple one. This guide will walk you through some of the issues around how to choose between an S-corporation and a C-corporation.

The content in this page is not a substitute for professional financial advice. Please contact your financial adviser before using the information presented here.

When you establish a corporation, you have a number of decisions to make. One of them relates to the tax treatment of the corporation. When you incorporate, the company will ordinarily be treated as a C-corporation, which is a separate entity for tax purposes that pays taxes on its earnings and distributes taxable dividends to shareholders. In some circumstances, however, shareholders may wish to forgo this treatment and have all of the corporation's earnings flow directly to them in the year they are earned. This guide will walk you through some of the issues that might affect your choice between an S-corporation and a C-corporation.

The content in this page is not a substitute for professional financial advice. Please contact your financial adviser before using the information presented here.

• Corporate ownership isolates personal assets from claims from corporate creditors because the corporation is a separate legal entity. This status, however, can create the issue of double taxation, as corporate profits are taxed once to the corporation when earned, and once at the individual level when the profits are distributed as dividends to shareholders. Electing subchapter S status preserves the asset protection, but eliminates the double taxation of profits by treating the entity for tax purposes as if it were a partnership.

(Tax Form from the IRS)

• In order to elect subchapter S status, a corporation must meet the following requirements:

1. Must have registered as a United States corporation
2. Must have only one class of stock
3. Must maintain no more than 100 shareholders
4. All shareholders are individuals, estates or certain qualified trusts
5. All shareholders consent in writing to the S-corporation election
6. All shareholders must have a U.S. Social Security number
7. The corporate fiscal year must end on December 31

• Although corporations are generally taxed as separate legal entities, the S-corporation election means that the earnings and losses of the corporation are passed directly through to the S-corporation in the year they are earned, regardless of whether they are distributed or not. Depending on the tax situation of the individual owners, this may produce substantial benefits.

• All owners may not realize a net tax savings, however, so advice should be sought from your financial advisor before making the election.

• There are also some disadvantages that come along with subchapter S status:

1. Inability to access the capital markets to raise funds
2. S-corporations cannot conduct certain kinds of business
3. Some items, such as fringe benefits paid to employees who are also shareholders, may not be fully deductible for tax purposes

• Making the decision to elect subchapter S status for your company will avoid the issue of double taxation, but the potential tax consequences should be verified with your tax advisor. There are also business limitations that go along with the election that must be considered when deciding whether a C-corporation or an S-corporation status is a better fit for your business.

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• Introduction
• Step 1: Are You Eligible for S-corporation Status?
• Step 2: Pass Through Taxation
• Step 3:Disadvantages of Subchapter S Status
• Conclusion