Using a S-Corporation

The second method for eliminating double taxation is the use of a device called an S Corporation. This is a type of corporation specifically provided for in the Internal Revenue Code. An S Corporation is treated differently for tax purposes than a conventional corporation (which is known as a "C Corporation"). If elected by the shareholders, an S Corporation will not be subject to tax at the corporate level. Instead, all corporate income is included directly in the income of the shareholders. There is no need to zero out the corporation with salaries since corporate income is now subject to tax only once, at the shareholder level. Additionally, if the corporation has a net loss, that loss can be used by the shareholders to offset other business income.

In order to qualify, the stock of an S Corporation must be held by 75 or fewer individuals and all shareholders must consent to the election. An S Corporation has all of the lawsuit protection features of a C Corporation. If unreasonable compensation is an issue or the corporation is expected to show net losses, an S Corporation would be a useful planning technique.