All corporations, including S corporations, must make certain calculations for accounting and tax purposes. Though there are several distinct differences between S corporations and other corporate entities, the way in which they determine shareholder equity is the same. However, the shareholder equity of most corporate entities is necessary for tax purposes, while the shareholder equity of an S corporation isn't.
About S Corporations
S corporations do not file their own separate tax returns. Instead, their income is divided among their shareholders according to their stakes in the company. Each shareholder reports his portion of the income on his tax return and pays the appropriate amount of income tax. Shareholders also divide the corporation's losses and use them to offset the income they earn during the year.
Determining Shareholder Equity
To determine the shareholder equity of an S corporation, subtract the value of the corporation's treasury shares from its paid-in capital. The corporation's treasury shares are those shares that it issued to shareholders and then repurchased. Its paid-in capital is the money it received from the sale of stock or other investments from shareholders. On a balance sheet, paid-in capital typically appears as "common stock" and "additional paid-in capital." If any shareholders paid a price higher than par value for their shares, some paid-in capital may also appear as "paid-in capital in excess of par value."
If an S Corporation's balance sheet shows common stock issued in the amount of $500,000, additional paid-in capital in the amount of $300,000 and treasury shares in the amount of $40,000, then its shareholder equity is $760,000. To determine this value, combine the values of the issued stock and the additional paid-in capital for a sum of $800,000 and subtract the value of the treasury shares.
While most other types of corporations must report their shareholder equity to the Internal Revenue Service for tax purposes, S corporations do not pay income taxes. Those with more than one shareholder, however, still report shareholder equity and other balance sheet entries to the IRS for informational purposes.