An S corp is a special type of corporation, of particular interest to sole proprietorships or partnerships. An entrepreneur who is interested in incorporating his or her business to limit personal liability to business assets may chose an S corp. This allows the entrepreneur to protect his or her personal assets in the event of business failure. A simple sole proprietorship or partnership does not provide this protection.

In a normal corporation, the business becomes an entity unto itself and is liable for the contracts that it enters as well as any obligations, such as product warranty or liability, that are a result of doing business as the corporation. This normally means that the corporation is also liable for income taxes on the earnings it receives. However, in an S corp, the earnings may flow through to the owners, and the owners may pay personal income tax on their earnings.

S corps are not treated the same in every state. In some states, an S corp is treated like any other corporation as far as tax liability goes. For this reason, it is important to seek professional advice before committing to setting up an S corp.

Even in states that allow S corps to pass through earnings to the entrepreneur, choosing to incorporate as an S corp rather than a regular incorporation is a complex tax question, and professional accounting and legal advice should be obtained. While there may be some tax advantages to incorporate as an S corp, there are also strict rules that the S corp must follow. In some cases, these rules or restrictions may negate the tax benefits.

Each possible S corp will require individual assessment regarding the pro and cons of going the S corp route. The possible benefits are dependant on both the actual and expected earnings of the intended S corp, as well as the financial position of the entrepreneurs involved. Fortunately, if you decide on an S corp structure and your reasons for choosing the S corp route change, the S corp can be converted to a regular corporation with some minor legal and accounting assistance.