S Corporation FAQs

Basics

What is an S corp?

Commonly used by small business proprietors, the S-corporation pays no corporate taxes, but instead passes profits and losses directly to its owners (the stockholders) who declare such profits and losses as part of their personal taxable income. In this manner S-coporations resemble partnerships, although some subtle differences in taxation exist. As a result, S-corporations do not become subject to the "double-taxation" that C-corporations enjoy. However, not all corporations qualify for S-corporation treatment.

How do I elect S corporation status?

To be treated as an S corporation, all shareholders must sign and file IRS Form 2553.

What are the Tax Implications?

S corporation are one of two business entities that allow pass-through tax treatment, thus avoiding the double taxation associated with standard C corporations. One advantage of an S Corp is that it can have a single owner and not have associated self employment taxes.

What are the ownership restrictions on S corporations?

The ownership of an S corporation is restricted to no more than 75 shareholders. S corporations cannot be owned by C corporations, other S corporations, many trusts, LLCs or partnerships. Lastly, an S corporation can only have U.S. citizens or resident aliens as shareholders.

How are profits distributed in an S corporation?

Given an S corporation can only have one class of stock, the percentage of ownership determines the percentage of pass-through income.

Are there restrictions regarding the sale of S corporation stock?

The stock of S corporations is freely transferable, thus the shareholders of S corporations are able to sell their interest without obtaining the approval of the other shareholders.

Creating an S Corp

What are the advantages and disadvantages of an S corporation vs. a limited liability company (LLC)?

S corporations and LLCs possess many similarities: Both offer limited liability protection and pass-through tax treatment.