Subchapter S Corporation Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Subchapter S Corporation, written in plain English, along with examples of how it is used.

What is Subchapter S Corporation?

(n) Internal revenue service enables a corporation to be taxed as a partnership, whereby the profit or loss can be transferred to shareholders instead of dividends. Such corporations are named as S Corporation. Subchapter S corporation provide the conditions contained in Sub chapter S by which a corporation is treated as S corporation

History and Meaning of Subchapter S Corporation

Subchapter S Corporation is a tax designation given to a corporation that meets certain Internal Revenue Service (IRS) criteria. This tax designation allows the corporation to enjoy the limited liability of a corporation while also having its income, losses, deductions, and credits passed through to its shareholders, who report this information on their individual tax returns. This avoids the issue of double taxation which occurs when the corporation is taxed on its profits, and then those same profits are taxed again when distributed to the shareholders as dividends.

This tax designation was created by Congress in 1958 under Subchapter S of the Internal Revenue Code (hence the name "Subchapter S Corporation") to encourage small businesses to incorporate. Before this, small businesses were often discouraged from incorporating due to the double taxation issue.

Examples of Subchapter S Corporation

  1. ABC Corporation elected to be taxed as a Subchapter S Corporation and therefore its profits, losses, and credits passed through to its shareholders.

  2. XYZ Corporation could not be considered a Subchapter S Corporation as it had more than 100 shareholders.

  3. DEF Corporation is considering electing to be taxed as a Subchapter S Corporation to avoid double taxation.

Legal Terms Similar to Subchapter S Corporation

  1. C Corporation: A type of corporation that is taxed separately from its owners and is subject to double taxation.
  2. Limited Liability Company (LLC): A type of business structure that combines the limited liability of a corporation with the tax benefits of a partnership, meaning the business profits are passed through to the owners or "members".
  3. S Corporation Election: The process by which a corporation can elect to be treated as a Subchapter S Corporation for tax purposes.