S Corporation (S Corp)

An S Corp is many times used in Multi-owner businesses that have elected to setup a corporation. It’s designed to avoid the double taxation that can occur with C Corps. There are certain criteria that must be met by the business to file as an S Corp. Taxes are filed on a separate return on form 1120-S. Corporate income, Losses, deductions, and credits are pass through to Shareholders to be taxed on their personal returns.

It’s worth noting that shareholders can receive both a salary (W-2 income) and distributions. In this way the business can retain earnings year over year, and the shareholder pays tax on the salary and potentially the distributions taken in that year. The shareholder will receive a K-1 at the end of the year. A S Corp differs from a Sole Proprietor, LLC, and Partnership which get taxed on the profits of that year even if money wasn’t paid out.

S corps do come with more rigid profit and loss allocations as compared to a partnership, as well as corporate formalities.