S - Corporation

In an S - Corporation, the business entity itself doesn't pay taxes; the shareholders are taxed as a part of their individual income tax. The tax burden impacts the shareholders directly; thus, we need to ensure a proper tax plan is in place to reduce any liabilities incurred due to losses. Some key pointers to consider are.

  • Some income and expense items are subject to separate rules regarding identification for tax purposes, like charitable contributions, capital gains, and foreign taxes.
  • Incomes and losses are distributed according to share ownership.
  • Losses and deductions are subject to passive activity rules.
  • Avail corporate and shareholder level deductions with Code Sec. 179.
  • Deduction on domestic production activities.
  • Fringe benefits tax treatments.
  • Avail below-market loans between S - Corporation and shareholders.
  • IRS Scrutiny of shareholder distributions who have not received compensation.
S - Corporation


  • The most popular structure among small businesses.
  • Your personal assets are not at risk from liabilities in the business.
  • You will not have to pay corporate-level tax in most cases.
  • Losses can be claimed to a certain extent from individual tax returns.
  • No alternative minimum tax (AMT) liability.
  • FICA tax is restricted to employee salaries paid out.
  • Not subject to accumulated earnings tax.


  • Cannot have more than 100 shareholders.
  • No shareholder can be a nonresident alien, corporation, and most estates and trusts.
  • Cannot own subsidiaries, making it challenging to expand.
  • S - Corporations have only one class of stock, restricting their ability to raise capital.
  • S - Corporation may be liable for a tax on its built-in gains.