The Theory Behind Subchapter S

Subchapter S status was enacted so that startup companies and other entrepreneurs would not shy away from choosing a corporate form of organization because of the potential for double taxation. A corporation that elects Subchapter S status is treated for federal income tax purposes as a partnership, but maintaining the corporate advantage of limited liability for its shareholders. Thus, corporations that elect Subchapter S status are known as ”S corporations” while all other corporations are called ”C corporations.”

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