A corporation can elect to be a Chapter S Corp. where the federal government does not tax the profit in the hands of the corporation, but allows the shareholders share of the profits to move over to the shareholder where it is only taxed once. If there are losses, these also pass straight through to the individual shareholders for tax purposes.

One must remember that this is a Federal provision and many states still levy state tax on the profits of the corporation as well as on the individual.

Not every corporation can elect to be a Chapter S Corporation.

There is a maximum of 75 shareholders in a Chapter S Corporation, and each shareholder must be a resident of the U.S.A.

What is the difference between Limited Liability Corporations and S Corporations?

LLCs and S corporations have only two things in common. They are both pass-through tax entities and therefore avoid double taxation, and they both offer their owners limited liability protection. You may want to consider their many differences along with your business needs before deciding which to file as.

LLCs have more freedom than S corporations in the kinds of owners who are allowed ownership in the entity. In the LLC, ownership rights are not limited. LLCs can enjoy non-US residents as owners, while S Corporations are limited to US residents. One person can have all the shares in an S Corporation, while many states require at least two members for LLCs.

When dealing with stock, LLCs can have many different classes of interest and the percentage of ownership does not necessarily dictate the percentage of pass-through shares each shareholder gets. In S corporations, the percentage of pass-through interest is determined by the percentage of ownership.

The stock in S corporations is freely transferable which means that a shareholder does not need the permission of the other shareholders to sell his stock. The members of an LLC would need the approval of the other members, if they wished to sell their interest, or ownership.

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