S-Corp Formation

S Corporation Formation

An S Corporation, or S Corp, is a special type of corporation that passes corporate income, losses, deductions, and credits through to shareholders for federal tax purposes.

This structure allows owners to avoid the double taxation typically associated with C Corporations. Shareholders report the business’s income and losses on their personal tax returns, much like a partnership or LLC.

Domestic Corporation Status

Your business must be a domestic corporation, meaning it must be incorporated within the United States.

Eligible Shareholders

Only eligible shareholders can own an S Corporation. This includes individuals, certain trusts, and estates. Partnerships, corporations, and non-resident aliens are not eligible to be S Corporation shareholders.

Limit on Number of Shareholders

An S Corporation is limited to 100 shareholders or fewer. However, family members (such as spouses, children, and parents) can be treated as a single shareholder, allowing for flexibility.

One Class of Stock

S Corporations can only issue one class of stock, meaning all shares must have the same rights to distributions and liquidation. While this limits flexibility, it simplifies ownership and governance.

File IRS Form 2553

To elect S Corporation status, your business must file IRS Form 2553 and meet all filing deadlines. This form must be signed by all shareholders and filed no later than two months and 15 days after the start of the tax year in which the S Corp election is to take effect.

Pass-Through Taxation

One of the main advantages of an S Corporation is pass-through taxation. This means the business itself isn’t taxed at the corporate level. Instead, profits and losses are "passed through" to shareholders, who report them on their personal tax returns. This avoids the "double taxation" that C Corporations face, where the company pays corporate taxes and shareholders pay taxes on dividends.

Limited Liability Protection

Like other corporations, an S Corp offers limited liability protection to its owners (shareholders). This means that shareholders’ personal assets are protected from business liabilities, debts, or legal actions.

Potential Tax Savings on Self-Employment Taxes

S Corporation shareholders only pay self-employment tax on their salaries, not on the entire distribution of business profits. This can result in significant tax savings compared to sole proprietorships or LLCs, where all profits are subject to self-employment tax.

Credibility and Perpetual Existence

Forming an S Corporation can increase your business’s credibility with customers, suppliers, and potential investors. Additionally, S Corps enjoy perpetual existence, meaning the business continues to exist even if ownership or leadership changes.

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