Although there are exceptions, most corporations owned by Internet entrepreneurs are Subchapter S corporations. ?Subchapter S? refers to a section of the U.S. Internal Revenue Code that gives special taxation benefits to this type of corporation. Many large publicly traded companies are organized as Subchapter C corporations instead. A Subchapter C corporation has its income taxed twice, once at the corporate level and a second time on the capital gains passed onto its shareholders. In contrast, a Subchapter S corporation is taxed once on its income at the shareholder level for capital gains. If a corporation qualifies for Subchapter S status at both the federal and state level, you can see major tax savings by having avoided the double taxation. Of course, this is something that you should discuss with both your attorney and your accountant before making a decision based on taxes to be paid. The Subchapter S corporation also offers (and so does a C corporation) a corporate shield to protect you in ways that are unavailable for a general partnership or a sole proprietorship. Under the law, the corporation is an entity separate from you. It can own assets and incur liabilities for which you are not personally liable. As long as you play by the rules and observe corporate formalities (i.e. run your Internet business as a corporation instead of your personal piggy bank), the corporate shield should hold to protect your personal assets if the business gets sued or the government launches an investigation.2 Combined with business insurance, a Subchapter S corporation creates a certain peace of mind because it is unlikely that your personal assets will be touched. 2 For all types of business entities, there can still be personal liability for unpaid business taxes and a few other things if the government comes after you. Now before you decide to form a Subchapter S corporation to sell things on the Web, consider what a limited liability company has to offer.
