An S corporation is a corporation that elects to be treated as a pass-through entity
(like a sole proprietorship or partnership) for tax purposes. Since all corporate
income is "passed through" directly to the shareholders who include the
income on their individual tax returns, S corporations are not subject to double
taxation. Moreover, the accounting for an S corporation is generally easier than
for a C corporation.
The following restrictions are placed on S corporations:
Must not have more than 100 shareholders, and each of them must consent. (A married
couple is treated as one shareholder)
Each shareholder must be an individual who is a U.S. citizen or legal resident, or an
estate or qualifying trust of such person
Can only have one class of stock. (However, voting differences within a class of
stock are permissible.) Preferred stock is not allowed
Must use the calendar year as its fiscal year, unless it can demonstrate to the IRS
that another fiscal year satisfies a business purpose
Not more than 25% of its income can be "passive income" (such as rental income,
interest, and royalties) over three continuous years
Corporations wishing to become an S corporation must file Form 2553 with the IRS.
Each shareholder must sign the form. LegalZoom can complete this form for you.
To learn more and to speak with a representative, please call us at (888) 381-8758.
