A subchapter S corporation is a standard
corporation that has elected a special tax status
with the Internal Revenue Service (IRS). S
corporations carry the same benefits as
C corporations,
such protecting the shareholders’ (or owners’)
personal assets from the debts and liabilities of
the business, unlimited life and tax deductibility
of certain business expenses. The primary
differences between S corporations and C
corporations are the way they are taxed and also the
ownership restrictions S corporations face.
When deciding which entity structure is most
appropriate for their business, small business
owners often view the potential double taxation of
profits associated with
C corporations as the
primary disadvantage to forming a standard
corporation. With C corporations, the profits are
taxed first at the corporate level, and then taxed
again at the individual level if they are
distributed to shareholders in the form of
dividends. Shareholders must report dividends as
personal income and pay taxes on that income.
Double taxation can be eliminated by completing the
S corporation election with the IRS. S corporations
are taxed as pass-through taxation entities, similar
to general partnerships and most limited liability
companies. While the profits of an S corporation are
reported at the corporate level, taxes are not paid
at the corporate level. Instead, the profits are
passed-through to the individual tax returns of the
shareholders and are taxed at the individual rate.
If the S corporation reports a loss, the amount of
the loss is also passed-through and reported on tax
returns of the shareholders.
Keep in mind, not all C corporations can make the S
corporation election with the IRS, as the IRS has
placed restrictions on S corporations. Current
restrictions include:
-
Shareholders must number fewer than 75, and all
shareholders must consent in writing to the S
corporation election.
-
Shareholders must be individuals, estates, or
certain qualified trusts.
-
Shareholders cannot be non-resident aliens.
-
S corporations can have only one class of stock
(disregarding voting rights).
To be classified as an S corporation, a corporation
must make a timely filing of Form 2553 with the IRS.
IRS instructions indicate that the form must be
completed and filed:
-
At any time before the 16th day of the 3rd month
of the tax year if filed during the tax year the
election is to take effect, or
-
At any time during the preceding tax year. An
election made no later than 2 months and 15 days
after the beginning of a tax year that is less
than 2 ½ months long is treated as timely made for
that tax year.
An election made after the 15th day of the 3rd month
but before the end of the tax year is effective for
the next year. For example, if a calendar tax year
corporation makes the election in April 2005, it is
effective for the corporation’s 2005 calendar tax
year.
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For questions on whether the S corporation
structure is best for your particular business, it
is best to seek the advice of an attorney or
accountant. |
