S corp stands for "Subchapter S corporation." The name comes from Subchapter S of Chapter 1 of the U.S. Internal Revenue Code, which sets the federal tax rules for this election.
For ****, the main points are:
| Term | Meaning |
|---|---|
| S corp | Short for S corporation |
| "S" | Refers to Subchapter S of the Internal Revenue Code |
| Main tax feature | Business income, losses, deductions and credits generally pass through to shareholders |
| Common purpose | Avoiding the double taxation that can apply to C corporations |
What Is an S Corporation?
An S corporation is a corporation that elects special federal tax treatment. The corporation generally does not pay federal income tax on its business income. Instead, income, losses, deductions and credits pass through to shareholders, who report their allocated shares on their personal tax returns.
This treatment can help an eligible business avoid the two-level federal tax structure that may apply to a C corporation. Under that structure, the corporation may pay income tax, and shareholders may pay tax again when the corporation distributes profits.
Is an S Corp a Business Structure?
An S corp is primarily a federal tax election, not a separate legal entity under state law.
A corporation can elect S corporation tax treatment. An eligible LLC can also make the election if it meets the federal requirements. The underlying legal structure and the federal tax election are separate decisions.
What Are the Basic S Corporation Requirements?
To qualify for S corporation status under federal tax rules, a business generally must meet these requirements:
- Be a domestic corporation or another eligible entity
- Have no more than 100 shareholders
- Have allowable shareholders, including individuals and certain trusts and estates
- Exclude partnerships, corporations and nonresident aliens as shareholders
- Have only one class of stock
- File IRS Form 2553 to make the S corporation election
Certain financial institutions, insurance companies and other ineligible corporations cannot elect S corporation status.
S Corp vs. C Corp
| Feature | S corporation | C corporation |
|---|---|---|
| Federal tax treatment | Generally pass-through taxation | The corporation generally pays corporate income tax |
| Shareholder restrictions | More restrictions | Generally fewer restrictions |
| Number of shareholders | Maximum of 100 | No comparable federal limit |
| Classes of stock | Generally one class | Multiple classes allowed |
| IRS election | Requires Form 2553 | No S corporation election |
State tax treatment may differ from federal treatment. Some states do not recognize S corporation status in the same way as the federal government.
Key Takeaway
S corp means "Subchapter S corporation." It refers to a corporation, or an eligible entity such as an LLC, that elects pass-through tax treatment under Subchapter S of the Internal Revenue Code. Before making the election, review the eligibility rules, payroll requirements and tax treatment in your state.