An S corporation, commonly known as an S corp, refers to a specific type of corporation in the United States, usually created through IRS tax election. More technically, it refers to a corporation which has the subchapter S designation, usually given by the IRS. Domestic corporations eligible for this designation usually apply for it in order to avoid double taxation.
An S corporation differs from other types of corporations in that its profits and losses can be passed through to your personal tax returns. This means that the company itself as an entity will not be obliged to pay taxes; only the company owner (or the shareholders) shoulder this burden.
An important clause that S corporations must adhere to regards how much the owners pay themselves. Usually, owners or shareholders of an S corporation who work for the said corporation have to be paid in a manner which can be deemed as reasonable compensation. This means that the money they earn from the company should be at par with fair market value. When this is not observed, the IRS has the mandate to reclassify the additional earnings as wages.
Forming an S corporation usually beings by first forming a corporation. After this, the owners or shareholders must then fill and file form 2553 in order to elect the corporation to become an S corporation. The criteria needed for eligibility vary from state to state. Once the form has been filed and the other criteria fulfilled, the company will then be granted the S corporation designation.