The question: Is the S corporation better than the sole proprietorship, the single-member LLC, and the C corporation as the tax-deduction choice of entity for your business?

This is the fourth article in our series on choice of entity, which began with the November 2011 issue.

In this article, we explore the tax-deduction advantages and disadvantages of the S corporation.

What Is an S Corporation?

The S corporation is a creature of federal tax law wherein you first form a corporation or an LLC and then elect taxation as an S corporation.1

Thus, your legal entity is the corporation or LLC, but your taxable entity is the S corporation.

For federal tax purposes, your S corporation is a pass-through entity, meaning that the corporation’s income, deductions, and tax credit items are passed through to you, the shareholder, on a Schedule K-1.

For some business owners, this is the best of both worlds: liability protection with personal taxation.

Special Rules

To elect S corporation status, the LLC or corporation must2

be a domestic corporation (including an LLC, which can file an S election without having to formally file a “check the box” election);

have 100 or fewer shareholders;

have no shareholders other than U.S. citizen individuals, resident alien individuals, estates, certain types of trusts, and certain types of tax-exempt entities; and

have only one class of stock.

Violations. If your LLC or corporation violates any of the above, it loses its S corporation ... Log in to view full article.