RealTown Words

A small domestic corporation that has elected to be treated more like a partnership for tax purposes (designated IRS Form 2553). The S corporation, once called a subchapter S corporation, allows a business to operate in corporate form and yet not pay a corporate tax, thus avoiding the double tax feature of corporate ownership. Each stockholder is taxable on his or her share of the corporation’s income, whether or not it is distributed to him or her.

Similarly, the stockholder can report his or her share of the corporation’s ordinary losses and deduct them on an individual personal tax return. Though there is no limitation on the amount of corporate income for an S corporation, there are important limitations on the number of shareholders (100).

S corporations are not subject to the corporate alternative minimum tax or the rule that requires most corporations to recognize their gain or loss on liquidating sales and distributions just as if the assets had been sold. Other major advantages of an S corporation include limited personal liability, ease of transferability of ownership shares, centralized management, and comparative ease of formation.

Its basic disadvantage is that aggregate losses may be passed through to the individual shareholders only equal to the amount of cash paid for the stock plus any loans made to the company. Thus, the S corporation’s most efficient application for real estate investment ownership is for projects designed to be other than tax shelters.