Frequently Asked Questions

How is the retained earnings account of an S Corp different from that of a C corporation?

The retained earnings account of an S corporation differs significantly from that of a C corporation due to the unique tax treatment of S corporations. An S corporation, often referred to as a flow-through entity, allows profits and losses to flow through to the owners and shareholders. This means that the corporation itself is not taxed, but the owners and shareholders report profits and losses on their personal tax returns. In an S corporation, the retained earnings account represents pre-taxed money that has been allocated to the owners but not yet distributed. This is in contrast to a C corporation, where the retained earnings account reflects after-tax money that the corporation retains instead of paying out as dividends to shareholders. This difference in the treatment of retained earnings between S and C corporations means that if an S corporation wishes to revert back to a C corporation, the same retained equity account cannot continue to be used. Additional calculations would need to be made to reconcile the accounts to reflect the correct balance.