S corporations are treated as corporations under state law. Legal liability under state law is generally the same whether the entity is a C corporation or an S corporation. However, they are treated as partnerships for federal taxation.
When you form a corporation, you do not form a “Subchapter S corporation” or a “C corporation” – you simply form a for-profit corporation. “Subchapter S” and “C corporation” refer to how the corporation is taxed. An S corporation is a corporation that has filed an election with the Internal Revenue Service to be taxed under Subchapter “S” of the Internal Revenue Code. To form a corporation, you file articles of incorporation with the Arizona corporation commission and submit a certificate of disclosure along with the articles of incorporation. Arizona, requires the extra step of public notice advertising to alert the general public who might engage in business with the entity that it will be operating as a corporation. After formation of the corporation, S corporation status is elected by all shareholders “owners of the corporation” by filing form 2553, Election by a Small Business Corporation. Once elected and approved for taxation under Subchapter “S”, items of income, loss, deduction, and credit pass through to the individual shareholders’ income tax returns in the same fashion as a partnership. This is accomplished using Schedule K-1 (Form 1120S) Shareholder’s share of income, deductions, credits, etc. Shareholders receive a form W-2 for reasonable compensation and Schedule K-1 for distributive share. The S corporation, a “pass-through entity”, will generally not pay income tax on its income but it must file an information return on form 1120S, U.S. Income Tax Return for an S Corporation to notify the Internal Revenue Service of its income, losses, deductions, and other items. The 1120S is purely informational. Currently, an S corporation may not have more than 100 shareholders and only one class of stock is allowed. No partnerships, corporations, or non-resident alien shareholders are allowed. There are strict formalities for qualification and maintenance of tax status. Failure to comply with the requirements will cause an S corporation to lose its status.