What Does the Label "Subchapter S" Mean/Refer To?
Understanding just where the label "Subchapter S" comes from and what it even means often makes it way easier to learn about this area of tax law.
Furthermore, understanding the term also makes working with people like your accountant and attorney a little more straightforward. So let me give you a quick overview...
Sections organize tax law using sections and subchapters
Congress organizes the federal tax law into numbered sections and lettered subsections. Some of these sections are even so popular that most taxpayers recognize them. For example, most people know at least a little bit about subsection k of section 401, also known as Section 401(k), because at one time they've participated in an employer 401(k) pension plan arrangement.
You won't be surprised to hear that Congress has passed thousands of tax laws. Accordingly, to further organize these tax laws, Congress organizes the sections into subchapters. For example, the sections, or tax laws, about trusts are mostly grouped into Subchapter J. The sections, or tax laws, about partnerships are mostly grouped into Subchapter K. And the sections, or tax laws, about life insurance companies are mostly grouped into Subchapter L.
And now we can explain where the label "Subchapter S" comes from--Subchapter S groups the sections, or tax laws, that apply when a business has elected to be treated as a small business corporation, also known as an S corporation. More specifically, Subchapter S groups the federal tax laws contained in Sections 1361 through 1379.
One final comment: subchapters, as you might guess, are further organized into numbered chapters. But people don't actually pay much attention to chapter numbers. Go figure.
Understanding the abbreviations
Here's the next thing you want to know, probably...
People commonly use the phrases "Subchapter S" or the abbreviation "Sub S" or the even shorter abbreviation "S" to refer to the small business corporations discussed in Sections 1361 through 1379. For example, someone might say, "I operate my business as a subchapter s corporation." Or he might say, "I own a Sub S corporation." Or "I'm an S corporation".
But to be technically precise, the tax laws don't label this way. Tax law calls the entity that's made the election described in Subchapter S a "small business corporation".
Subchapter S not just about corporations
Another comment (and one we make again and again on the pages of this web site): Confusingly, an S corporation isn't necessarily a corporation--in a state corporate law sense.
A variety of entities may elect to be treated as S corporations. A corporation, predictably, may make the election. A limited liability company may make the election. And so may a few other entities as well, including professional corporations, professional limited liability companies, limited partnerships, and limited liability partnerships.
Additional Information You May Find Useful
If you want additional information about how to maximize the tax savings related to running a business or investment venture, you may also be interested in one of our downloadable e-books (see descriptions below). Each book covers a category of tax planning topics that easily save a business owner significant amounts of income or self-employment taxes (potentially thousands of dollars a year) and is instantly downloadable.
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