What is a Subchapter S Corporation?
A Subchapter S corporation is a corporation, which meets the requirements for and has made a proper election to be taxed under Subchapter S of the Internal Revenue Code. Although its taxation is a creature of the tax code it is not a corporation, which is organized under the Internal Revenue Code. This seems to be a popular misconception among entrepreneurs. Why Elect Subchapter S status? The primary perceived benefit is one layer of tax. A corporation like IBM is taxed under “Subchapter C” of the Internal Revenue Code. IBM pays taxes on its net profits and then the IBM stockholders pay taxes when the profits are paid out to them. In contrast, in a Subchapter S corporation the corporation’s net profit or net loss is deemed distributed to the stockholders, who have to include it on their individual tax returns whether or not they actually receive cash. It used to be a relative no brainer to elect S if you qualified. The highest corporate rates were higher than highest individual rates.
