S Corporations

S corporation is a type of corporation that meets certain IRS requirements to qualify for a special tax status. S corporations are considered pass-through entities, meaning that the corporation does not pay federal income taxes. Instead, the corporation’s income, deductions, and credits are passed to the shareholders, who report them on their tax returns.

To qualify as an S corporation, a corporation must meet certain criteria, such as having no more than 100 shareholders, all of whom must be individuals, estates, certain trusts, or certain tax-exempt organizations. The corporation must also have only one class of stock and cannot have more than 25% of its income derived from passive sources.

S corporations are popular among small business owners because they offer the limited liability protection of a corporation while allowing the income to be taxed as if it were earned by an individual. This can result in tax savings for the shareholders, as they may be able to avoid double taxation that can occur with traditional C corporations.

How to Become an S Corporation?

S corporations do not enjoy tax exemption but avoid double taxation. Instead of being taxed twice on income from the corporation to its owners, who report it individually – making S corporations more reliable business structures for banks, clients, and vendors. However, S corp owners must still pay FICA taxes, Federal Unemployment Tax, LIFO, and built-in gains taxes when selling assets. In addition, state or local business income and employment taxes must also be paid.

To qualify as an S corporation, it must fulfill IRS standards regarding its shareholders and operation. A shareholder must be an individual who resides either within the United States, such as citizens or residents, or estates of deceased people; husband-and-wife couples can count as one shareholder, as can trusts that own stock in the corporation; however partnerships and foreign corporations cannot serve as shareholders, nor can nonresident aliens or tax-exempt corporations – nor can more than one class of stock be issued within an S corporation itself.

If a company no longer meets the S corp requirements, it must file Form 2553 with the IRS to cease being an S corporation. Loss of S corporation status could occur through changes such as transfer to partnership, foreign corporation, or ineligible trust; changes to accounting method or liquidation procedure or change in shareholder approval to withdraw election as S corporation revocation by shareholders holding over 50% of the outstanding stock;