An S corporation is a special type of corporation formed for specific tax purposes.
It is taxed as a partnership: The entity itself doesn’t pay taxes, and all the profits and losses pass through to the shareholders.
An S corporation is formed basically the same way as a C corporation: Your business lawyer helps you form the corporation, file your articles, get your tax ID number, and set up the corporate record book. The one additional step is filing a form with the IRS that qualifies the business as an S corporation.
One potential drawback is that the structure of an S corporation is limited; limits apply to:
- Number of shareholders
- Types of shareholders
- Classes of stock
Another potential issue is related to taxes:
The deductibility of certain expenses may be different than for other entities, so you’ll want to discuss this with your accountant.