Frequently Asked Questions
How is the accounting system for an S Corp different from a C corporation?
Understanding the accounting system for an S corporation (S corp) is crucial for business owners. An S corp is a flow-through entity, meaning the money flows through the corporation to the owners and shareholders. Unlike a C corporation, an S corp is not taxed; instead, the owners and shareholders report profits and losses on their personal tax returns. The accounting system for an S corp is similar to that of a C corporation, but there are differences due to tax treatment. An S corp should have four main equity accounts: Common stock, Additional paid-in capital, Distributions paid to the shareholders, and Retained earnings. Common stock and Additional paid-in capital represent the total amount of capital invested into the business by each shareholder. Unlike a C corp, which can have two separate stock accounts, an S corp can only have one class of stock. Distributions paid to the shareholders account is referred to as “distributions of earnings and profit” in an S corp, as it doesn’t pay dividends. The profits and losses of the corporation are passed on to the owners.
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