An S corporation is a small business corporation that has filed for S corporation tax status. A predecessor to the limited liability company, s-corporation, just like a sole proprietorship or LLC, also experiences pass-through taxation where the business’s profits pass through to the company’s owners as personal income.

S corporations provide limited liability with the tax benefits of a sole proprietorship or partnership. However, there are restrictions to consider: An S corporation is limited to 100 shareholders (all legal U.S. residents) and only one class of stock, and must declare each stockholder’s share of income from the business’s profits. Unlike an LLC, where owner’s profits can be out of proportion to their monetary investment, an S corporation’s shareholder’s piece of the corporate pie must be proportional to their investment. Of the most noteworthy advantages to forming an S corporation is that shareholders avoid self-employment taxes and reduced taxable gains on the sale of the business.

Consult your state treasury department to find out how S corporations are taxed in your state. Consult the IRS for more information on S corporation’s taxation rules.