Subchapter S Corporations
"S Corp"

Another type of corporation is the S Corporation. It files its own tax return but pays no taxes. The tax return is an informational return only. It tells the IRS and the State to whom the profits or losses are passed on to by means of a form called a K-1. The "stockholders" are the ones that pay the tax of the S Corp on their personal returns.  Persons forming an S Corp make a financial investment in the new company, called their basis.  Any losses are balanced against an individual's investment.

To elect to be treated as a S Corp, tax-wise, Form 2553 must be filed with the IRS on a timely-basis and accepted by the IRS.  When forming this entity, be clear who will be responsible for completing and sending in this form.

Most of the same rules apply to the S Corp that the C Corp has to follow including Articles of Incorporation and issuance of stock. One of the biggest audit issue for the IRS concerning S-Corps is Reasonable Compensation to the employee/owner Stockholders.  An owner who is also an employee must be paid a reasonable salary for the duties of the position.  If the owner takes a small salary to avoid self-employment taxes, and then take "large" distributions, the IRS may challenge the arrangement.