An “S” corporation is a “C” corporation which has made an “S” tax election by filing IRS Form 2553. This change allows the corporation to be taxed like a sole proprietorship or partnership instead of a separate entity. The primary difference is earnings or profits pass through directly to the shareholder’s personal 1040 tax return. “S” corporations typically match their fiscal year-end with the calendar year-end and all profits are taxed evenly, if not distributed. State taxes apply to individuals who reside in certain states such as California (even thought the business may not be operating in the state) with an individual state income tax. “S” corporations may have a maximum of 100 shareholders with one class of stock and are generally smaller sized companies. “S” corporations file an 1120-S tax return with the IRS.
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