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An S corporation, or S corp, is a corporation that elects to be treated as a pass-through entity. It’s a popular option for small business owners, but might not be a good fit for startups.
As a pass-through entity, an S corp passes on all its income, losses, deductions, and credits to its shareholders. The arrangement can help shareholders avoid the double taxation that happens with C corps—when both the corporation and shareholders pay taxes. S corps also allow small business owners to pay themselves a salary and take company earnings as an owner’s distribution, which may offer them tax benefits.
However, startup founders may be better off incorporating as a C corp. Unlike S corps, a C corp can have different classes of stock, over 100 shareholders, and foreign shareholders. Also, other companies, such as VC firms, can’t invest in S corps.
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