An S-Corporation or a Subchapter S Corporation is a normal corporation that meets certain criteria and elects to be a “small business corporation” which allows the corporation to pass the profits and losses through to the shareholders (while maintaining the limited liability).
Requirements for an S-Corporation
To receive the pass-through taxation benefits must meet the following:
- The corporation cannot have more than 100 shareholders
- All shareholders must be individuals, although there are some exceptions.
- The corporation cannot have a nonresident alien as a shareholder.
- One economic class of stock (differences in voting rights are allowed, but the shareholders must have identical rights to distribution).
- All shareholders must consent to the election in writing at the time of the election.
- A timely filing of the S election must be filed with the IRS.
The requirements must be closely monitored to ensure compliance. If the corporation fails to meet the requirements, the exemption will be terminated.
Income that you receive as a shareholder in an S-Corporation is taxed as an individual (no double taxation like a C-corporation).
See a CPA/tax consultant for the exact tax consequences of starting your business as an S-Corporation.
- Limited Liability
- Shareholders are only liable for the assets that they have contributed to the corporation
- Pass through Taxation
- The corporation and shareholders are not taxed twice, they are taxed as a partnership.
- Alienability of Shares
- A shareholder is able to buy/sell their shares in the corporation, thus easily (relatively) transferring their interest.
- Challenging to Start
- Articles of Incorporation must be filed with the Secretary of State, the Subchapter S filing must be filed with the IRS, the corporation must keep and maintain corporate formalities (i.e. annual board of directors meetings, corporate minutes, etc.).
- Challenging to Maintain
- In addition to the regular corporate formalities that must be maintained each year, an S-Corporation must continuously monitor their status to ensure compliance with the IRS qualifications. Failure to ensure compliance could be very costly to the corporation and shareholders.
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