• Sub S Corporations get their name because of Subchapter S of the internal revenue code that created them. Often referred to simply as S Corporations or S Corps, these special corporations differ from traditional C Corporations in their shareholder requirements and tax filing. S Corporations and C Corporations are both formed the same way, by filing articles of incorporation. The difference between the two is that an S Corporation's shareholders sign IRS Form 2253 to take on S Corp taxation instead of C Corp taxation. Taking on the S Corporation status has several tax advantages.
  
  

Limited Liability

• Both C type and Sub S corporations benefit from limited liability protection. This means that the shareholders of the corporation cannot be held personally liable for the debts, liabilities or obligations of the corporation. It is said that a corporate veil exists between the assets of the shareholders and the obligations of the business.
  
  

No Corporate Taxes

• C Corporations pay corporate income tax on their profits. Once the tax is paid the remaining profit can be paid out as a dividend or retained as corporate earnings. The dividends paid to the shareholders are also subject to taxation, and because of this it is said that C Corporations suffer double taxation. S Corps do not pay corporate income taxes and therefore save this tax expense.
  
  

Net Profit Taxes

• The net profit left in an S Corporation is reported on the income tax returns of each shareholder proportional to their ownership share in the business. This income is subject to ordinary income taxes but is not subject to Social Security or Medicare taxes. The total effective tax rate on this income is typically much lower than on income earned via payroll payments from the S Corp to its shareholders when they act as employees of the company.
  
  

Ability to take W-2 wages

• While the S Corporation profit may have tax advantages, there are also advantages to taking W-2 paychecks. W-2 paychecks are typically most valued by lending institutions when offering home or auto loans; for this reason S Corporations are superior to partnerships, LLCs, or sole proprietorships. Those forms of business entity do not allow for owners to take W-2 payroll wages.
  
  

Conversion to C Corp

• Unlike LLCs or partnerships, S Corporations can easily convert into C Corporations. There may be some tax liabilities created during the transition but it is largely a tax planning and tax filing issue. Once an S Corp converts back into a C Corporation it can access additional capital through initial public offerings on public stock exchanges. LLCs, S Corps and partnerships cannot access capital in this fashion.