by Investing School on April 19, 2010

An S-Corporation is a distinction that is used by the United States government for federal income tax purposes. It describes a corporation that elects or chooses to be taxed under the Subchapter S of Chapter 1 located in the Internal Revenue Code.

S-Corporations do not usually pay income taxes. What happens instead is the shareholders will absorb any losses or take in any of the corporation’s income. The responsibility then lies with the shareholder to report the income or loss on their own individual income tax returns. This is called single taxation.

This is an appealing choice to many corporations because this status provides many of the perks that come with partnership taxation but at the same time it gives owners limited liability protection from creditors. You can locate the rules that apply to S-Corporations in Chapter 1 of the Internal Revenue Code book in sections 1361-1379.

S-Corporations are recognized as individual entities separate from their shareholders within the state in which they were organized. Their shareholders are afforded limited liability protection. All payments to S-Corporation shareholders are distributed tax-free and this is because these distributed earnings were previously taxed. S-Corporations are not held to the 10% of taxable income limitation that is applicable to charitable donation deductions. Instead they can go above this.

S-Corporations are not eligible for a dividends received deduction. This is a tax deduction that a corporation can receive on the dividends it receives from other corporations in which the corporation has stake in ownership.

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