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.
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.
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.
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.
must complete and file IRS Form 1120s to report its annual income to the
IRS each year.
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
In addition, the
corporation may never have more than 75 Shareholders.
Only One Class
may have only one class of stock.
that loses its status as such may not re-elect S-Corporation status for
a minimum of five years.
Who Should Elect
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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