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S corporation

An S corporation or S-corp is a corporation, limited liability company, or other eligible entity that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code.

Unlike a regular C corporation, an S corporation generally pays no corporate income taxes on its profits. Instead, the shareholders in the S corporation pay income taxes on their proportionate shares, called distributive shares, of the S corporation's profits. Shareholders must report the income (and pay a related tax, if any) regardless of whether the shareholders receive distributions from the S corporation.

Qualification for S corporation status

In order to make an election to be treated as an S corporation, the following requirements must be met:

Must be an eligible entity (a domestic corporation, a partnership or a single-member or multiple member limited liability company).
Must not have more than 100 shareholders.
Shareholders must be U.S. citizens or residents, and must be natural persons, so corporate shareholders and partnerships are to be excluded.
Must have only one class of stock.
Profits and losses must be allocated to shareholders proportionately to each one's interest in the business.

If a corporation meets the foregoing requirements and wishes to be taxed under Subchapter S, its shareholders may file Form 2553: "Election by a Small Business Corporation" with the IRS within 75 days of the first tax year. The 2553 form must be signed by all of the corporation's shareholders. If a shareholder resides in a community property state, the shareholder's spouse generally must also sign the 2553.

The S corporation election must typically be made within two months and fifteen days after the beginning of the tax year for which the election is to take effect, or at any time during the year immediately preceding the tax year for which the election is to take effect. However, Congress has directed the IRS to show leniency with regard to late S elections. Accordingly, often times, the IRS will accept a late S election.

Some states such as New York require a separate state-level S election in order for the corporation to be treated, for state tax purposes, as an S corporation.

If a corporation that has elected to be treated as an S corporation ceases to meet the requirements (for example, if as a result of stock transfers, the number of shareholders exceeds 100 or an ineligible shareholder such as a nonresident alien acquires a share), the corporation will lose its S corporation status and revert to being a regular C corporation.

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From Wikipedia