Texas Legal Entities
S Corporations
An S-corp elects to be taxed by Subchapter S of Chapter 1 of the Internal Revenue Code. An S Corporation is differentiated as it does not pay income taxes. Instead, the shareholders are responsible for paying. Losses or gains are divided by shares and then are reported on the individual income tax returns.
An S corporation entitles the owners to limited liability protection from creditors as well as providing many of the advantages of partnership taxation. The rules and regulations concerning an S corporation can be found in Subchapter S of the Internal Revenue Code (1361-1379). With an S classification, the legal environment of C corporations is combined with taxation akin to taxation of partnerships.
Under state law, S corporations receive treatment as corporations. Recognition is given as a separate legal body and in most cases shareholders are given the same liability protection of C corporations. Taxation wise, S corporations are similar to partnerships. Payments received by shareholders from the corporation are delivered tax-free. In addition, several corporate penalty taxes such as the personal holding company tax and the accumulated earning tax do not pertain to an S Corporation.
There are several factors which set an S corporation apart from a C corporation. First, S corporations are not qualified for a dividends received deduction. However, S corporations do not have a limitation of 10 percent of taxable income to charitable contributions.
If you are interested in starting an S corporation and would like more information, please contact Texas Legal Entities at 512-472-2431.
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