S Corporation Structure

By John Cromwell

An S corporation is a tax designation that a business must apply for with the Internal Revenue Service. Used for small businesses, the benefit of the S corporate designation is that it allows the business to be taxed as a partnership. To apply for S corporate status, the business must submit a completed Form 2553 within 2 months and 15 days after the beginning of the first tax year that it wants to be treated as an S corporation.

An S corporation is a tax designation that a business must apply for with the Internal Revenue Service. Used for small businesses, the benefit of the S corporate designation is that it allows the business to be taxed as a partnership. To apply for S corporate status, the business must submit a completed Form 2553 within 2 months and 15 days after the beginning of the first tax year that it wants to be treated as an S corporation.

Basic Requirements

To qualify as an S corporation, a business must either be a corporation or be eligible to be treated as a corporation for tax purposes. As a result, a limited liability company can elect to be an S corporation. The business can have no more than 100 shareholders or members, who must be individuals, estates, exempt organizations or certain trusts. Shareholders cannot be corporations, partnerships or nonresident alien, and the S corporation can only have one class of stock. The S corporation cannot be a bank, insurance company, possessions corporation or a domestic international sale corporation. The business’s tax year must either end on December 31 or end on a date based on a clearly established business purpose. Finally, all of the shareholders must agree to let the business become an S corporation.

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Corporation Structure

If the S corporation starts as a corporation, it will have three levels of management. The corporate officers, such as the chief executive officer, run the day-to-day activities. The officers are hired by the board of directors, who is also responsible for making decisions regarding big picture corporate strategy. The board is chosen by the shareholders at the annual shareholder meeting. Specifics regarding which level of management makes which decisions are generally defined by the corporation’s bylaws, which are the rules that the shareholders agreed to when the corporation was started.

LLC Structure

If the S Corporation is an LLC, it can be structured in one of two ways. A member-managed LLC allows of the business’s owners to make legally binding decisions for the business. This means that every member has a say in how the business is managed, can hire employees and can enter into contracts on the LLC’s behalf. A manager-managed LLC restricts management powers to a few select individuals; unless the business’s owners are selected, they cannot make day-to-day decisions for the business.

Tax Structure

The chief benefit of being an S corporation is that the business is taxed as a partnership. This means that instead of the S corporate entity being taxed and then its shareholders being taxed whenever the business makes a distribution, the shareholders pay taxes on the business income as it is earned. For example, if there are four shareholders with an equal stake in an S corporation that earned $100,000 for the year, each shareholder would report $25,000 of income on his tax return.

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S Corporation Passive Income Restrictions

References

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Define S Corp

An S corp is not a separate type of corporation. Instead, it is merely an election that a corporation makes that changes its tax treatment under the Internal Revenue Code, Subchapter S. However, not all corporations are eligible to elect S corporation status. Knowing your options for your company can help you save money on your taxes so you can have more money to reinvest in your company.

Basics of an S Corporation

To gain the protection of limited liability, many businesses incorporate. However, this subjects the profits to two layers of taxation: the corporate tax on company earnings and the personal income tax on distributions. To take advantage of the more favorable pass-through tax treatment, corporations that meet certain requirements can elect to become an S corporation.

Subchapter S Corporation Advantages

A subchapter S corporation is an IRS approved and regulated business organization. To qualify, a business must comply with several restrictions. These restrictions include the business only being allowed to have 100 or fewer shareholders, none of which can be partnerships or corporations. S-Corp shareholders are also prohibited from owning preferred shares in the business. S-Corps are prohibited from participating in certain industries, such as insurance. These restrictions may make it more difficult to obtain investment, but for many businesses, the advantages of being an S corporation outweigh any disadvantages from the S-Corp regulations.

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