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The “S” Corp

The “S” Corp

What’s an S-corp? Many business owners hear from colleagues and friends that an “S-corp”is the best structure for a business. This really depends on the nature of your business, how its equity will be set up, and whether its founders are all located in the U.S.

That’s because an S-corp can only issue one “class” of shares (which will be a problem for many investors), and because it cannot have nonresident aliens as shareholders. That said, if an S-corp makes sense, it’s deceptively simple to set up: an S-corp is simply a corporation that elects to be taxed as an S-corp.

What does that mean? The S-corp is a “pass-through entity,” like an LLC: losses and profits pass through to the owners’ personal tax returns. A C-corporation, by contrast, is its own entity, and pays taxes at the corporate level. If owners are paid dividends, there is the possibility of double taxation with a C-corporation, since theoretically the corporation will pay tax on the income, and owners will then pay income on the dividends.

An important note is that an LLC can also elect to be taxed as an S-corp. This may seem strange given that both are pass-through entities, but the S-corp offers some tax planning perks that you don’t get with a standard LLC. So if your CPA says that you simply must have an S-corp, but you don’t want to deal with appointing a board or holding regular meetings, an LLC taxed as an S-corp may be a good option.