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Simple English definitions for legal terms
Subchapter S corporation
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A quick definition of Subchapter S corporation:
A Subchapter S corporation, or S corporation, is a type of company that is taxed differently than a regular corporation. Instead of paying taxes on profits at both the corporate and individual level, an S corporation's profits are only taxed once, at the individual level. This means that the shareholders of the company are responsible for paying taxes on their share of the profits. 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:
A Subchapter S corporation, also known as an S corporation, is a type of corporation that is taxed differently from a regular 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 profits.
For example, let's say that an S corporation has three shareholders. In a given year, the corporation makes a profit of $100,000. The profit is divided among the shareholders based on their ownership percentage. If one shareholder owns 50% of the corporation, they would report $50,000 of income on their tax return.
S corporations are different from regular corporations, which are also known as C corporations. In a C corporation, the corporation pays taxes on its profits, and then the shareholders pay taxes again when they receive dividends. This is known as double taxation.
There are some restrictions on who can form an S corporation. The corporation must have fewer than 100 shareholders, and all of the shareholders must be individuals or certain types of trusts. The corporation can only have one class of stock, which means that all shareholders have the same rights and privileges.
S corporations are often used by small businesses and family-owned companies. They are also popular with companies that want to avoid double taxation. However, they are not suitable for companies that want to raise money from venture capitalists or other institutional investors.