S-corporation is a tax term that refers to a corporation or an LLC that elects to be taxed under the rules of Subchapter S of the Internal Revenue Code.
S-corporations share many of the same characteristics as partnerships. S-corporations generally do not pay income taxes themselves. Instead, the results of the S-corp’s operations are reported on an informational tax return called Form 1120-S. The end results of corporate operations pass through to the corporation’s shareholders, who report their share of the corporation’s operations on their personal tax returns.
The other type of corporation for tax purposes is a C-corporation. One things that can be hard to understand is: S-corp and C-corp are tax terms. For legal purposes, a corporation is a corporation.
Difference Between S-Corps and C-Corps
Let’s say a corporation has income of $100,000 and expenses of $60,000, leaving it with net income of $40,000.
If the corporation is an S-corp, the owner(s) of the corporation will report their share of the net income of $40,000 on their personal tax returns.
If the corporation is a C-corp, the corporation will file a Form 1120 showing $40,000 of net income and the corporation itself will pay corporate income tax on the $40,000.