What is an S corporation?
What is an S Corporation? An S Corporation is simply a C Corporation (also known as a standard business corporation) that files IRS form 2553 to elect a special tax status with the IRS. The same filing procedure is used for both types of businesses within the State. However, an S-Corporation must file an additional tax form that will give the S-corporation a special tax status with the IRS. This special tax status enables S-corporations to avoid paying corporate income tax. C-corporations must pay corporate income tax.
The term S Corporation refers to the way in which the corporation is taxed. An S Corporation receives treatment as a pass-through entity. There is no corporate level income tax. Instead, a pro rata portion of the annual profit or loss of the S Corporation is included on the personal tax return of each shareholder. Generally, if IRS Form 2553 is filed within seventy five (75) days after incorporation, the corporation will be treated as an S Corporation for tax purposes. Many start-up businesses benefit by making the election to be taxed as an S corporation.
An S corporation is a fairly complex business form, where the owners all hold shares of stock. Nevertheless, all profits and losses flow through to the individual shareholders according to their ownership interest, and there is no corporate income tax. To establish a corporation, Articles of Incorporation must be drawn up and filed with the state, along with a docketing statement. An S corporation election must be filed with the IRS and with the state Department of Revenue. (If you do not file this election, you will be considered a C corporation!) All owners have limited exposure to liability, and the business can continue upon the death of a shareholder or the transfer of ownership of shares. The primary disadvantages of an S corporation are: the relative complexity of the paperwork involved, and the fact that there may be no more than 75 shareholders. It is advisable to have an attorney handle the setup of a corporation. This is a great form for businesses that plan to grow large.
An S Corporation is merely a corporation that has elected a special tax status. This tax treatment permits the corporation’s income to be treated like the income of a partnership or sole proprietorship in that the income is “passed through” to the shareholders. Thus, shareholders report the income or loss generated by the S Corporation on their individual tax returns, avoiding double taxation. In order to be considered an S Corporation, the stockholders of a properly filed corporation must elect such status within 75 days of formation for the current tax year, or at any time during the preceding tax year. This election is made by filing Form 2553 with the IRS. The ownership of an S Corporation is subject to certain restrictions. S Corporations can have no more than 75 shareholders, cannot have any non-US resident shareholders and cannot be owned by C Corporations, other S Corporations, many trusts, LLCs or partnerships. In addition, S Corporations are not allowed to own 80% or more of
There are only two types of corporations: for profit corporations and not-for-profit corporations. Many registered agent firms dont even know that both LLCs and corporations can be taxed as S corporations, provided that they meet the eligibility requirements. With the Tax Reform Act of 1986, the S corporation became a highly desirable entity for corporate tax purposes. An S corporation is not really a different type of corporation. It is a special tax designation applied for and granted by the IRS to corporations and LLCs that have already been formed. Many entrepreneurs and small business owners are partial to the S corporation tax status for corporations and LLCs because it combines many of the advantages of a sole proprietorship, partnership and the corporate forms of business structure. All corporations start out as C corporations. If they elect to continued to be taxed under Subchapter C of the Internal Revenue Code, a C Corporation is a completely separate tax and legal entity fr
What is an S corporation?