S Corporation is a normal legal corporation filed with the Secretaray of State. Then the shareholders elects to be taxed under Subchapter S of the Internal Revenue Code. The S corporation is separate and distinct from the corporation's owners. Under most state law, there is no distinction between a C corporation and an S corporation. The incorporation process is the same. However, the two type of corporate entities are subject to differing federal and state tax treatment.
Eligibility for S corporation tax status is based on compliance with IRS regulations regarding the number and characteristics of stockholders, type of stock issued, and other characteristics specified in the regulations.
S corporation tax implications are that income or loss, including capital gains, pass through to the stockholders, and is treated as income to the receiving individuals, like a partnership. S corporation income passed through to stockholders and is subject to state and federal income tax, but is not subject to self-employment tax when employee-stockholders receive adequate compensation salaries. Pay of corporation employees for a S Corporations are subject to payroll taxes in the same manner as is the case for employees in any other type of economic activity.