An S corporation differs only from a regular corporation (or C) in that it elects to be taxed under subchapter 1 of the IRS’s Internal Revenue Code. Congress created Subchapter S in the tax code in 1958 to promote corporations. Entrepreneurship and small business S corporations combine the benefits of a partnership. C corporations, on the other hand, allow more flexibility in the number and types of shareholders as well as different types of shares.
Qualifications for S Corporation Status
In order for an election to be considered an S corporation, the following requirements must be met:
Must be an eligible entity (domestic company or limited liability company).
Requires only one layer of stock ( see common stock vs. preferred stock ).
The spouse is automatically considered the sole shareholder. Family, which means a person who is descended from a common ancestor, including a spouse and ex-spouse of a common ancestor, or whoever is descended from that person, is considered the sole shareholder as long as the members in Families discriminate against them.
Shareholders must be U.S. citizens or residents and must be corporations (individuals). Therefore, corporate and partnership shareholders are exempt. However, some tax-exempt companies, especially 501 corporations ( c) (3) is authorized to be a shareholder.
Profits and losses must be allocated to shareholders in proportion to their individual interests in the business.
If a company is elected to be considered an S corporation, it ceases to comply with the requirements. (For example, if, as a result of the transfer of shares, the number of shareholders exceeds 100, or an unentitled shareholder such as a non-citizen alien acquires the shares), the company will lose its S Corporation status and revert to a normal C corporation.
For both S and C corporations, formation generally requires state filing, obtaining a federal tax identification number, and an S election. State filing generally includes:
- Articles of Association
- corporate regulations
- written consent from the integrator
- Resolution of the first meeting of the Board of Directors
If a corporation meets the requirements of S corporation status and wants to be taxed under Subchapter S, its shareholders can file Form 2010: “Election by Small Business Corporations” with the Internal Revenue Service (IRS) Form. The 2010 form must be signed by all company shareholders. If the shareholder resides in a community property state, in general, the shareholder’s spouse must also sign the 2010 form.
Generally, S Corporation elections must be made by the fifteenth day of the third month of the tax year in which the election is intended to take effect, or at any time during the immediately preceding year of the tax year. Some states, such as New York and New Jersey, require separate S-level elections in order for corporations to be treated for state tax purposes as S corporations.
Although employee Medicare and FICA taxes, as well as state taxes, are not affected by a company’s corporate structure, federal income tax practices are different for C and S corporations. Corporate tax rates are often lower than personal income tax rates. However, in the case of C corporations, double taxation is applied because (a) the corporation is taxed on its profits and (b) when these profits are distributed to the shareholders (owners), the owners are taxed on the dividends. these
Corporation S can avoid this double taxation by reporting all income on the shareholder’s personal income tax return. This is proportional to the ownership of each shareholder in the company. It also means that the loss suffered by the company can be reported on the shareholder’s personal income tax return. This will reduce the tax burden on corporation C, accelerate losses and offset the company’s future profits.
For S corporations, shareholders report income on Form the 1120S, salary on Form W-2, and profit distribution on Schedule K-1. For C corporations, tax reporting is on Form 1120 for salary income on Form W. -2 and profit distribution on Form 1099-DIV