An S corporation is a corporation that elects to be treated as a pass-through entity
(such as 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 stockholders, and each of them must consent. (A married
couple is treated as one stockholder).
Each stockholder must be an individual who is a U.S. citizen or 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 stockholder must sign the form. LegalZoom can prepare this form for you.
To learn more and speak with a representative, please call us at (888) 381-8758.
We are happy to answer any questions you may have.
