Import / Export Kit For Dummies, 3rd Edition
Book image
Explore Book Buy On Amazon

An S corporation is a special form of corporation that allows the earnings of the corporation to be taxed only as individual income — the corporation does not pay taxes. Additionally, the S corporation also preserves the owners' right to limited liability.

A corporation can elect to be an S corporation under the following conditions:

  • It must be a domestic corporation with only one class of stock, which means that all shares must share the same rights (dividends).

  • It can have no more than 100 shareholders.

  • It can't have a nonresident alien as a shareholder.

  • It must be eligible for S status for the entire year.

  • All shareholders must give the approval to the firm's choice of S corporation status.

  • It must file a Form 2553 (Election of Small Business Corporation) with the IRS within the first 75 days of the corporation's fiscal year if the corporation wants to make the election of S status effective for the current tax year.

The majority of these restrictions aren't likely to be a concern for most small businesses, many of which have five or fewer individual shareholders. Note that S corporation earnings are not subject to the self-employment tax requirement of sole proprietorships or partnerships.

One potential problem with an S corporation is the way that profits and losses are allocated among owners for income-tax purposes. The IRS states that shareholders in an S corporation must pay taxes on profits in proportion to their stock ownership. So if you have five shareholders, each of whom holds 20 percent of the corporation, each shareholder must pay taxes on 20 percent of the corporation's profits.

About This Article

This article is from the book:

About the book author:

John Capela has taught marketing, management, and international business courses at St. Joseph's College in New York for 20 years. He is president of CADE International, which provides consulting and training in international business including importing, exporting, licensing, and foreign investment.

This article can be found in the category: