A regular corporation, can be subject to corporate tax rates ranging as high as 39%. Additionally, after tax corporate income, when distributed as income to shareholders, will be taxed a second time on the individual's personal income tax returns.

The double taxation of corporate earnings can be legally eliminated with a Subchapter S Corporation.

A Subchapter S Corporation retains corporate benefits such as limited liability, free transferability of interests, and continuity of life. However, through a Subchapter S Corporation income is taxed directly to the shareholders, thus avoiding corporate taxes.

The following example shows how a Subchapter S Corporation can eliminate double taxation and lead to a tax savings:

Mary, sole shareholder of Fun Wear Clothing (a regular corporation) is in the 39.6% tax bracket.

Assume that Fun Wear Clothing has a taxable income of $1 million for 1994 and wishes to distribute all of its earnings to Mary. Shown below, are the tax effects of regular corporate status versus a Subchapter S Corporation.

Thus, if Fun Wear Clothing elects Subchapter S Corporation status, its sole shareholder will receive $604,000 after all taxes are paid, instead of $398,640 from a regular corporation, a net benefit of $205,360!