Getting Started - Legal Structure
S Corporations

S Corporations

In some cases, to alleviate a tax burden, individuals may choose to form an S Corporation (formerly known as a Subchapter S Corporation). An S Corporation is a corporation for which an election has been made with the Internal Revenue Service for the income to pass through and be taxed directly to the stockholders on a pro-rata basis. This allows the small business owner to avoid dealing with the double taxation of profits and dividends. Also, shareholders may be able to offset business losses by the corporation against their personal income, subject to certain restrictions.

Some provisions for forming an S Corporation are

• The corporation mush have thirty-five or fewer shareholders who are either individuals, estates, or certain qualifying trusts

• The corporation may have only one class of stock

• Nonresident alien shareholders are ineligible

• All shareholders must consent to an election

• The corporation may not own 80 percent or more of another corporation

• At least 75 percent of the company’s receipts must be derived from the business rather than outside investments or passive income

• Former S Corporations that have revoked or had their S status terminated must wait five years before making a new election