S Corporation Regulations

By Thomas King

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.

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.

Eligible Entities

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.

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Shareholder Requirements

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.

Additional Considerations

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.

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Can Living Trusts Own S Corporation Stock?

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Corporations that meet the qualifications to be an S corp can be taxed as a pass-through entity. This allows the shareholders to report the income on their personal returns, thus avoiding the corporate income tax. However, if the company doesn't comply with the S corp requirements, it will lose its special tax status and revert to being taxed as a C corporation.

Can a Chapter C Corporation Carry Over to a Personal Tax Return?

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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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