See sole proprietorship, limited liability corporation, and C corporation.
An S corporation is a type of incorporation for a company which "fits" for companies with 100 shareholders or less. In this case, a company's profits aren't taxed twice when paying out profits to shareholders.
Example:
Kendra's Kazoo Factory has 50 shareholders and made $5M in profits, pre-tax, last year. Normally, her company would pay $1.5M in taxes and then only have $3.5M to pass through to the 50 employees. Those employees then pay their personal individual income tax on that $3.5M. Figure it's about 40%, and the $3.5M turns into $2M after taxes. So we've taken $5M in profits and turned it into $2M by giving over $3M to the Taxman.
But in an S Corporation type of incorporation, there's no corporate slice of $1.5M meat—instead, all $5M is passed through to the 50 employees who then pay their 40%-ish tax, and the $5M turns into $3M instead of $2M.
Definitely a better deal for the people who worked hard to earn that money.
Related or Semi-related Video
Finance: What is a Corporation?89 Views
Finance a la shmoop what is a corporation? corp-o-ration.. [Mouth saying syllables of corporation]
see the Corp in there? well it's latin short for corpse or
body so a corporation may or may not be cold and covered with maggots [Man disguised as a corpse wakes up and screams]
corporations are just legal bodies they're generally set up so that
there's a clear legal distinction between things and individual does and
things that the company she works for does let's say you want to set up your [mime artists at the window of a shop]
own mime training studio brother can you spare a mime, but then you hit a wall
one of your mime trainees becomes badly injured while trying to get out of a [mime trainee gets injured while attempting to get out of a glass box]
glass box and you get sued you lose..wow you're totally speechless so your
corporation which was basically just you ten grand in the bank and a hat rack [Laptop showing $10.000 in the bank beside a hatrack]
full of berets well it loses everything you turn over your 10k to the sue-er
the one who sued you and you dust off your hands and move on try new venture [mime dusts off hands]
tapping into your prior experience as a mime therapist well legally the guy who
sued you while working for the corporation can't sue you personally
your $350,000 home is untouchable yeah who knew miming paid so well same deal [Mimes $350,000 home]
on that untouchable-ness of your Prius and the untouchable-ness of your
collection of invisible ropes, the legal body of the corporation threw itself on [Mime pretending to move along an invisible rope]
the landmine of your lawsuit and took the blow while you just walked away [Mime artist moon-walking off stage]
Up Next
What is an LLC? LLC stands for Limited Liability Company. It is a hybrid type of company that combines the corporate protections of separating corp...