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S Corporations are corporations that have elected to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. It has the legal protections and environment of a C Corporation, but is taxed much like a partnership. Like a C corporation, an S corporation is valid under the law of the state in which the entity is organized. S corporations are separate legal entities from their shareholders and generally provide their shareholders with immunity from personal responsibility for corporate debt, unless there has been a personal guarantee. As with partnerships, the income, deductions, and tax credits of an S corporation flow through to shareholders annually, regardless of whether distributions are made. Thus, income is taxed at the shareholder level and not at the corporate level. Payments to S shareholders by the corporation are distributed without being taxed first, as they would be in a C corporation.

Advantages or S Corporations. In general, S Corporations do not pay any income taxes. Instead, the corporation's income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns.

Disadvantages of S Corporations. I've noted that S Corporations that have passed through all of their profits to shareholders have a struggle during tough economic times. They have little or no reserves to carry them through recessions, and must turn to borrowing or loans from shareholders to get operating funds. This can mean borrowing during times when money is tight, and expensive.