S Corporation
What is an S Corporation
An S Corporation begins its existence as a general, for-profit corporation upon filing the Articles of Incorporation at the state level. A general for-profit corporation (also known as a 'C corporation') is required to pay income tax on taxable income generated by the corporation.However, after the corporation has been formed, it may elect "S Corporation Status" by submitting IRS form 2553 to the Internal Revenue Service (in some cases a state filing is required as well). Once this filing is complete, the corporation is taxed like a partnership or sole proprietorship rather than as a separate entity. Thus, the income is "passed-through" to the shareholders for purposes of computing tax liability. Therefore, a shareholder's individual tax returns will report the income or loss generated by an S corporation.
Qualifying for S Corporation Status
To qualify as an S corporation, a corporation must timely file IRS Form 2553 with the IRS. This election must be made by March 15 if the corporation is a Calendar year taxpayer in order for the election to take effect for the current tax year. However, a "New" corporation may make the filing at anytime during its tax year so long as the filing is made no later than 75 days after the corporation has began conducting business as a corporation, acquired assets, or has issued stock to shareholders (whichever is earlier).To qualify for S corporation status, the corporation must be a U.S. corporation with only one class of stock. In addition, the corporation cannot have more than 75 shareholders. Further, shareholders must be individuals, estates or certain qualified trusts, who consent in writing to the S corporation election. No shareholder can be non-resident alien.
Corporate Formalities
An S-Corporation follows the same state formalities as does a C-corporation (i.e. filing Articles of Incorporation and paying state fees). However, an S-Corporation must make a special tax election under sub-chapter S of the Internal Revenue Code by filing IRS Form 2553.
IRS Filing
The S-Corporation must complete and file IRS Form 1120s to report its annual income to the IRS each year.
General Shareholder Requirements
ALL shareholders of the corporation must be U.S. Citizens or have U.S. Residency Status. If, for any reason, shares are somehow sold or transferred (even if by will, divorce, or other means) to a shareholder who is a foreign national, the corporation will lose its S-Corporation status and be treated as a C-Corporation.
In addition, the corporation may never have more than 75 Shareholders.
Only One Class of Stock
S-Corporations may have only one class of stock.
Losing S-Corporation Status
An S-Corporation that loses its status as such may not re-elect S-Corporation status for a minimum of five years.
Who Should Elect S-Corporation Status
Owners who want the limited liability of a corporation and the "pass-through" tax-treatment of a partnership will often make the S-Corporation election.
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