 Hello, in this lecture, we will define S-Corporation. According to fundamental accounting principles, while the 22nd edition, the definition of S-Corporation is, corporation that meets tax qualifications so as to be treated like a partnership for income tax purpose. Therefore, an S-Corporation is going to be a type of corporation, but we're trying to get the best of both worlds from something like a partnership and something like a corporation as we will explain as we go. What is the difference between an S-Corporation and a C-Corporation? An S-Corporation is a pass-through entity. Remember that a C-Corporation is a separate legal entity, so when we think about a corporation form of business, the idea of the corporation is that it's separate from the owners. What does that do? It provides liability protection to the shareholders of their personal assets, among other things. That's one of the great benefits of a C-Corporation. The drawback of the C-Corporation is that because the corporation is now a separate legal entity, it needs to pay separate taxes at the corporate level as well. The tax is going to be taxed at the corporate level and then it could be taxed again on the individual level as the money goes to the individual in the form of dividends, kind of like draws for a corporation. The partnership, on the other hand, is a flow-through entity and it does not, a general partnership does not have that same level of liability protection to the personal assets of the partners because it's not a separate legal entity. However, they do eliminate that double taxation by having the flow-through of the income go to the individual partners be taxed one time on their 1040. The S-Corporation is a concept to try to get the best of both worlds. Still being a corporation, still having that liability protection, however, the money or the income flowing through to the shareholders' 1040 rather than being taxed at the corporate level. So in an S-Corporation, we have the investors. We've got the investors being the shareholders, they're going to invest in the business and they are the owners of the business being shareholders similar to a C-Corporation. The S-Corporation taxable income will be reported on the 1120 S in a similar fashion as a corporation being reported on just an 1120. The 1120 S, however, will then have a K1 that will be the document that will flow that income to the form 1040. Although we have to file a tax return for the S-Corporation, no tax is paid at the point in time at the corporate level, but rather it's going to be flown through in the form 1040 kind of like a W-2 for an S-Corporation reporting the income that will then be reported on the form 1040 eliminating that double taxation. Why does it matter if the tax is at the corporate level or the individual level? And again, the main reason is that double taxation. If we tax it at the corporate level, then dividends are also taxed so that the individuals cannot draw out the money as they can in a partnership or a sole proprietorship. The dividends being the form of draws for a normal corporation are a taxable event. Therefore, the income is going to be taxed at the corporate level and when they distribute it to the owners, it's taxed at the individual level. The rates could differ as well, of course, between the corporate tax rates and the individual tax rates. That's something to consider between the entities as well. What other benefits might an S-Corporation structure produce? The main thing is going to be the liability protection from a normal partnership. That's one of the major reasons why someone would want to incorporate to try to increase that liability protection to the personal assets. It's going to be a separate legal entity. That being the thing that results mainly in the increase in that liability protection. It's also possible to get more capital investments in some ways because we can have more shareholders and therefore have equity investments by the purchasing of shares within an S-Corporation.