S Corporation

An S corporation ("S Corp") is simply a corporation that has elected to be taxed under subchapter S of the Internal Revenue Code. Since S corps are considered a separate legal entity it offers limited liability to its shareholders. A shareholder's liability is generally limited to the amount the shareholder has invested in the s corp. Much like any other corporation, the S corp. is managed by a board of directors and is capable of continuing indefinitely. The entity is not affected by the death or incapacity of its shareholders, officers or directors, or by the transfer of ownership. S corporations are taxed much the same way partnerships are taxed. Gains and losses are passed through to the shareholder and are not taxed at the entity level (subject to a 1.5% franchise tax in California).

An S corporation does have some limitations. First, an S corporation can have only one class of stock. Second, this type of business entity can only have 100 shareholders. Third, all shareholders must be United States citizens. Finally, certain types of trusts and other business entities are prohibited from owning stock in an S corp. These issues can have a huge impact on the way you raise capital. As a business attorney with a master's degree in taxation, I enjoy consulting with business owners and helping them avoid major pitfalls in business formation or compliance.