- Limited Liability: Like C Corporations, S Corporations offer limited liability protection to their shareholders. This means that the personal assets of shareholders typically cannot be used to satisfy corporate debts or liabilities.
- Taxation: S Corporations are considered pass-through entities for tax purposes. This means the corporation itself does not pay federal income taxes. Instead, income, losses, deductions, and credits are passed through to the shareholders, who report them on their individual tax returns.
- Shareholder Limitations: S Corporations have specific eligibility requirements for shareholders. For instance, they cannot have more than 100 shareholders, and those shareholders must generally be U.S. citizens or residents, certain types of trusts, or certain tax-exempt organizations.
- Formalities: S Corporations must comply with certain formalities, such as holding regular director and shareholder meetings, keeping corporate minutes, and maintaining accurate financial records.
- Advantages:
- Avoidance of double taxation.
- Limited liability protection for shareholders.
- Potential tax savings through deductions and credits that flow through to shareholders’ individual tax returns.
- Disadvantages:
- Stricter operational requirements compared to other business entities.
- Shareholder restrictions may limit flexibility in raising capital or attracting investors.
- Potential for higher administrative costs due to required formalities.
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