Sub S Corporation

Understanding What Sub S Corporation Means

Understanding Sub S Corporation can be a little complex; we know that there are several different types of businesses that are available such as corporations, partnerships, and sole traders. Where does Sub S Corporation fit into these? Sub S Corporation is basically for US tax purposes. This is a corporation that chooses to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code; this means that a Sub S Corporation does not pay federal income taxes.

Instead, the corporation’s income or losses are divided among and passed through the Shareholders. The Shareholders must then report the income on their own income tax returns. They will be taxed as a single taxation, but if the corporation is taxed as a C corporation, then it is done as a double taxation. This means that both the corporation’s profits and the shareholders’ dividends will be taxed.

Let us break this down even farther. Sub S Corporation is a form of a corporation with 75 or less shareholders, to be taxed as a partnership, but with the benefits of incorporation. How does one become a Sub S Corporation? There are qualifications that must be met. As previously stated, there must be 75 or less shareholders; these must be individuals that have American citizenship or pass the resident “alien” test.

Then the qualifying corporation will need to elect to be taxed under the Subchapter S and a one page form is signed by all shareholders. There are both advantages and disadvantages with Sub S Corporation; the advantages include: limit on personal liability for business debts, must report their share of corporation profit or loss on their personal tax returns and offset income from other sources with corporate loss. While the disadvantages include: a partnership or sole proprietorship are less expensive to create, there is more paperwork involved than a limited liability company which offers similar advantages, income is allocated to owners according to the ownerships interests and fringe benefits are limited for owners who own more than 2% of shares. Hopefully, with all of the information that has been provided here regarding Sub S Corporation will help with the understanding what it is about.