S Corporations

An S corporation, often simply called an “S corp”, is a popular business structure for small businesses providing the time-honored liability protections of a corporation while simultaneously permitting the benefits of pass-through taxation. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid the double taxation on the corporate income – to which so-called “C” corporations are subject generally.

1. Eligibility Criteria

To qualify for S corporation status, the corporation must meet the following requirements:

 Be a domestic corporation

• Have only allowable shareholders
  • May be individuals, certain trusts, and estates and
  • May not be partnerships, corporations or non-resident alien shareholders
• Have no more than 100 shareholders
• Have only one class of stock
• Not be an ineligible corporation (e. certain financial institutions, insurance companies, and domestic international sales corporations) prevented from qualification.

****Partnerships (including all entities taxed for federal tax purposes as partnerships),

       corporations and many trusts cannot be shareholders of S corporations****

2. Formation and Registration

• Incorporate: To become an S corp, a business must first incorporate in its home state.
• File Form 2553: After incorporation, the business must submit Form 2553 to the IRS to elect S corporation status.

3. Taxation

• Pass-through Taxation / No corporate income tax: Instead of the corporation paying federal corporate taxes, the income, losses, deductions, and credits flow through to shareholders who report these on their individual tax returns.
• State Taxes: Depending on the state, an S corp might still be subject to certain state taxes.

• Not every business is right for S corporation status. It’s important to discuss with a legal, tax or accounting professional to determine if this structure suits your needs.
• Failure to meet the requirements can potentially result in the loss of S corporation status, which might bring about undesirable tax consequences including, without limitation, double “C” corporation taxation from the point of failure.

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