An S Corporation begins its existence the same way that a “C-Corporation” (discussed here) begins its existence — as a general, for-profit corporation upon filing the Articles of Incorporation at the state level.
However, after 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.
Qualifying for 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 of the current year 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:
Losing S-Corporation Status
Failure to observe ANY of the above requirements could revoke S-Corporation status at any time. An S-Corporation that loses its status as such may not re-elect S-Corporation status for a minimum of five years.
Corporate Formalities
An S-Corporation 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 as described above.
IRS Filings
The S-Corporation ust complete and file IRS Form 1120s to report its annual income to the IRS each year.
General Shareholder Requirements
ALL shareholders 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 C-Corporation.
Who Should Elect S-Corporation Status
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. In most cases, corporations that would benefit from S-Corporation status are those who plan on distributing the majority of earnings to its shareholders in the year those earnings are derived. Corporations who plan on retaining earnings for future investments in future tax years often choose the C-Corporation because under the S-Corporation, earnings will be taxed as if they were distributed to shareholders regardless of whether a distribution actually occurred or whether the corporation retained the earnings for future investment.
Good luck in all your business endeavors!
By: Philip K. Akalp, Esq.
NOTE: The information contained herein is intended to serve as a general publication providing general information to the public. The information herein should NOT be considered as a substitute for legal advice. MyCorporation.com strongly urges you to contact an attorney before making any decisions that concern financial or legal matters.
Philip K. Akalp, Esq. is the Chief Executive Officer and Co-founder of MyCorporation.com, the Internets Leading Incorporation, LLC Formation, and Trademark Service Provider. Since its launch in 1998, Mr. Akalp has had the privilege of forming over 70,000 corporations and LLCs for small business owners across the nation. Click here for more information on forming LLCs and corporations.
