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Simple English definitions for legal terms
S corporation
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A quick definition of S corporation:
An S corporation is a type of company that is taxed differently than a regular corporation. Instead of being taxed twice, once at the corporate level and again when profits are distributed to shareholders, an S corporation's profits and losses are passed on to its shareholders to be declared on their individual tax returns. However, there are some restrictions on who can be a shareholder in an S corporation, such as a limit on the number of shareholders and the types of entities that can own stock. S corporations are often used by small businesses and closely held companies that want to avoid double taxation.
A more thorough explanation:
An S corporation is a type of corporation that is taxed differently from a regular corporation, also known as a C corporation. In an S corporation, the profits and losses are passed through to the shareholders, who report them on their individual tax returns. This means that the corporation itself does not pay taxes on its income, but the shareholders do.
For example, let's say that an S corporation has three shareholders. In a given year, the corporation earns $100,000 in profits. The profits are divided among the shareholders based on their ownership percentage. If one shareholder owns 50% of the corporation, they would report $50,000 in income on their tax return. If another shareholder owns 25%, they would report $25,000 in income, and so on.
One advantage of an S corporation is that it avoids the "double taxation" that can occur with a C corporation. In a C corporation, the corporation pays taxes on its profits, and then the shareholders pay taxes again when they receive dividends. With an S corporation, the profits are only taxed once, at the individual shareholder level.
However, there are some restrictions on who can form an S corporation. For example, an S corporation cannot have more than 100 shareholders, and all shareholders must be individuals or certain types of trusts. Additionally, an S corporation can only have one class of stock, which means that all shareholders must have the same rights and privileges.
Overall, S corporations are a popular choice for small businesses and closely-held corporations that want to avoid double taxation and have a simpler tax structure.