An eligible existing corporation can elect to become an S corporation. This means that the corporation is taxed under the provisions of Subchapter S of the U.S. Tax Code. The purpose of this election is to avoid double taxation. Thus, rather than taxing the corporation and then taxing the shareholders, all the corporate income passes through to the individual shareholders, who only have to report the income on their individual tax returns.
Only domestic corporations are eligible to elect to become S corporations. Domestic corporations include joint-stock companies, insurance companies and associations. However, certain domestic corporations are ineligible to become S corporations, including members of affiliated groups of corporations, domestic international sales corporations, corporations that take the Puerto Rico and possessions tax credit, as well as banks and insurance companies taxed under Subchapter L of the Internal Revenue Code.
To qualify as an S corporation, the domestic corporation must have no more than 100 shareholders. Certain trusts qualify as shareholders of an S corporation. However, for the purposes of calculating the number of shareholders, the trust itself should not be counted as a shareholder. Additionally, if a husband and wife own stock, even if they own the stock separately, they are counted as one shareholder.
Additional Shareholder Requirements
All shareholders must be residents on the United States. Moreover, while individuals, estates and certain trusts qualify as shareholders, partnerships and corporations do not.
Class of Stock
To qualify as an S corporation, the domestic corporation must have only one class of stock. This means that no stock is inherently worth more than another stock. Thus, if you own 25 percent of the stock, you receive 25 percent of the losses, profits and credits. Put another way, no stock has a higher claim on the assets and earnings of the corporation than another stock. However, an S corp can issue voting shares and non-voting shares; these do not constitute two different classes.
To become as S corporation, all the shareholders must give their consents. The corporation must then fill out and file IRS Form 2553. You can find this form in the "Forms and Publications" section of the official website of the Internal Revenue Service.