S Corp Restrictions in Georgia

By Thomas King

Eligible Georgia business can elect S corporation status for purposes of federal taxation. The benefit of making the election is that it allows your business to avoid paying income taxes at the corporate level. Instead, the profit of the business passes through to each shareholder, who declares the income on his personal tax return. The business's profits are therefore taxed only once. Certain restrictions prevent every business entity from electing to be treated as an S corporation.

Eligible Georgia business can elect S corporation status for purposes of federal taxation. The benefit of making the election is that it allows your business to avoid paying income taxes at the corporate level. Instead, the profit of the business passes through to each shareholder, who declares the income on his personal tax return. The business's profits are therefore taxed only once. Certain restrictions prevent every business entity from electing to be treated as an S corporation.

Choice of Entity Requirements

In order to become an S corporation in Georgia, an entity must first be a domestic corporation organized in Georgia. For S corporation purposes, "domestic corporation" includes joint-stock companies, insurance companies and associations. "Domestic corporation" does not include members of an affiliated group of corporations, current or former domestic international sales corporations, and insurance companies that are taxed under Subchapter L of the Internal Revenue Code.

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Shareholder Requirements

A Georgia S corporation can have no more than 35 shareholders. Moreover, the shareholders are limited to individuals, estates, and trusts, excluding foreign trusts and trusts that qualify as an IRA. Because of the numerical limitation, the way shareholders are counted is extremely important. For purposes of determining the number of shareholders for an S corporation, a husband and wife and their estates are counted as one shareholder, even if they own stock separately.

Class of Stock Requirements

A Georgia entity that has more than one class of stock does not qualify as an S corporation. An entity has one class of stock if all outstanding shares of stock -- stocks held by investors, including restricted shares owned by company officers and insiders, as well as common shares held by the public -- give identical rights to distribution and liquidation proceeds. Note that differences in voting rights do not create additional classes of stock for S corporation purposes. Thus, if one stock includes voting rights and another stock does not, they will still be treated as one class of stock, assuming they confer identical rights to distribution and liquidation proceeds.

Filing Requirements

In order to elect S corporation status in Georgia, an eligible domestic corporation must fill out Form 2553 and mail or fax it to the Internal Revenue Service Center, Ogden, UT 84201. The fax number is (801) 620-7116. Note that the form must be filed before the sixteenth day of the third month of the tax year in order to take effect during that tax year.

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What Is the S-Corporation Intended For?

When incorporating your business as a regular corporation, also known as a C corporation, you get the benefit of limited liability, but you potentially subject yourself to double taxation. If you remain a partnership or sole proprietorship, you avoid double taxation but don't get the benefit of limited liability. An S corp is still a corporation, it's just taxed differently. The federal government enacted S corp legislation in 1958 so that small businesses could select an entity that granted limited liability and avoided double taxation.

S-Corp Shareholder Requirements

An S corporation is a business that has made the election to be taxed as a pass-through entity, meaning that each shareholder reports her portion of the business's income on her personal tax return. However, noncompliance with the shareholder limitations could terminate the S corporation election, causing the company to be taxed as it was before the election. For example, if the company was a C corporation before the election, it goes back to being taxed as a C corporation. Instead of the company’s income being taxed just once, it’s hit with the corporate tax when the company makes the money and with the personal income tax when the company distributes it to shareholders.

How to File for an S Corp in Tennessee

Most corporations are taxed twice. First at the corporate level and then at the shareholder level. An S corporation -- sometimes called an S corp -- is a corporation that has elected to be taxed under Subchapter S of the U.S. Tax Code. This means that the corporation is taxed only once (at the shareholder level), just like partnerships and sole proprietorships. To file for S corp status in Tennessee, your corporation must meet certain requirements and you must submit the proper paperwork.

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