What is a Sub-Chapter S Corporation?

Many businesses in the United States are organized as corporations. Corporations are a very common type of business form for many different reasons. Corporations make it easier to buy and sell ownership interests in a company. Corporations can provide protection for owners from liability, limiting their risk to the money invested and ensuring owners do not become personally liable for corporate debts and judgments. Corporations can also allow a business to make some choices about how the company profits are taxed and how losses are declared. Incorporating can even make a business entitled to some types of tax deductions that are not available to individuals. 

While choosing to incorporate is very smart for a lot of businesses, it is important to make an informed choice about whether incorporating is right for your organization. If you do decide that your business should operate as a corporation, you will also need to decide if you should operate as a Sub-Chapter C corporation or if you should operate as a Sub-Chapter S corporation. An experienced San Jose corporate lawyer at the Law Offices of Mike Ross can help you to make the choice about which type of corporation is right for you.

Should You Operate as a Sub-Chapter S Corporation?

When you incorporate a business, the default option is to operate as a C-Corporation. This means that the company is taxed on profits and on losses. When the company wishes to distribute profits to its owners, then the company will provide payouts in the form of distributions or dividends. The owners will have to declare the money they make from their investment in the corporation. As a result, this can lead to double taxation since the corporation is taxed on profit and the owners are then taxed again on money they make.  Because of the risk of double taxation, it is important to talk to a lawyer about whether a C-Corportion is a viable business option.

An S-Corporation allows you to avoid this double taxation. You will need to file a special form with the Internal Revenue Service (Form 2253).  You have a limited period of time in which to file this form and elect to be taxed as a Sub-Chapter S Corporation. This type of corporation actually gets its name from the section of the Internal Revenue Service code that outlines how it is to be taxed.

If you file the form and elect to operate as a Sub-Chapter S Corporation, then pass-through taxation rules will apply. This means that just like with a partnership, your income and losses from the business pass through to the individual owners who declare the profits and the losses on their personal tax returns. There is no double taxation.  Owners of an S-Corp can enjoy the liability protection benefits associated with being incorporated but will not be at risk of paying more in taxes. Owners can also take a portion of their income as non-salary distributions, which means that certain taxes such as Social Security tax do not need to be paid on this money.

There are limits on who can own a Sub-Chapter S corporation so you should talk to a lawyer about whether your business can qualify. A San Jose business la attorney at the Law Offices of Mike Ross will help you to choose the best business form for your company. Call today to learn more.

Mike Ross
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