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An S corporation is a corporation or an LLC which has elected to be taxed under subchapter S of chapter 1 in the Internal Revenue Code. This election classifies the business as an S corporation and allows it to forego paying federal income tax. The S corporation is a pass through entity that divides its profits or losses among the stockholders who will in turn report those income or losses to the federal government and pay the appropriate taxes based on their individual income. This election essentially prevents double taxation. A corporation must file form 2553 to be an S-corporation. If the business is an LLC, it must first file form 8832 to be classified as a corporation.
Protection for owners
The S corporation, whether an LLC or a traditional corporation, provides limited liability protection for personal assets; owners are not generally liable for the debts and legal liabilities of the corporation. The business must, however, observe some formalities to maintain this protection. The corporation must remain in good standing with the state in which it operates, and must keep business transactions and records separate from those of the owners.
Protection from double taxation
The S corporation election is primarily to prevent double taxation. In regular C corporations, the company pays tax on its profits, and then pays a dividend from its after tax profits. The stockholder who receives the dividend also pays tax on the dividend received, although the corporation has already paid tax on it, hence the term double taxation. The S corporation pays no tax, instead the owners pay tax on their individual share of the profits. The S corporation has another relief from tax because it is not required to file a Florida state return or pay Florida income tax. The C corporation on the other hand has to file a Florida state return and pay state income tax.
Qualifications to be an S corporation
Things to Consider