S Corporation Structure

The S corporation offers identical limited liability protection as the C corporation, however the C corporation creates a scenario of double taxation because the corporation pays tax before any dividends are paid to the shareholders, who would then be required to pay personal income tax on the dividend. The decision to incorporate as a C or S corporation is one that requires careful consultation with a tax advisor.

It is easier to protect the stock ownership of a C corporation from exposure from lawsuits. S corporation shares must be owned by natural persons (or disregarded entities such as a single member LLC). C corporations, limited partnerships, multi-member LLCs and other legal entities (with a few exceptions) cannot own shares of an S corporation. Accordingly, there are fewer options to protect S corporation shares from personal creditors. However, S corporation shares can be protected in several ways.

Key features of the S corporation include:

• The S corporation is taxed as a proprietorship or partnership and corporate profits are taxed only once when they pass through to the shareholders. In other words, the corporation itself is not taxed, its owners are.
• The S corporation is limited to 100 shareholders that must all be U.S. citizens or residents.
• The S corporation must be organized under U.S. law, recognized by the IRS (and meet certain rigid guidelines), must have only one class of stock and not own 80% or more of the stock of another corporation.

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