An S Corporation is a small business Corporation whose shareholders have made a choice to be taxed under personal income tax law rather than Corporation law.
An S Corporation is not treated as a separate taxable entitiy like a C Corporation.
The S is for Chapter S of the IRS code.
No Corporate income tax is paid to the IRS for an S Corporation.
For tax purposes net income is "passed through" the S Corporation to the personal income tax of the shareholders.
With an S Corporation double taxation (paying both corporate and personal taxes) can be avoided while retaining all the legal protections of a C Corporation.
In addition, federal law allows a nontaxable Employee Stock Ownership Plan to hold stock in an S Corporation.
This gives shareholders a way to defer some of their taxes.
No tax is paid on these stocks until they are withdrawn from the Plan.
All corporations start out as a C Corporation.
In order to be treated as an S Corporation a form must be filed with the Federal government within 75 days of incorporation of the C Corporation, or within 75 days of a new year.
S Corporation eligibility requirements include:
An S Corporation is required to hold corporate and shareholder meetings just like a C Corporation.
An S Corporation is required to pay taxes only once a year (vs. quarterly for a C Corporation).
- Less than 75 shareholders
- All shareholders must be either US citizens or resident aliens, certain trusts, estates or organizations
- Business entities and non-resident aliens may not be shareholders
- Only common (not preferred) stock may be issued
- The end of the fiscal year must be Dec. 31 S
45 states accept a Federal S Corporation election if the Corporation has filed a valid IRS S Corporation Election form. In Arkansas, New Jersey, New York, Ohio, and Wisconsin, a separate state S Corporation election must be made.