S Corporation Compliance

By Larissa Bodniowycz, J.D.

S Corporation Compliance

By Larissa Bodniowycz, J.D.

Ensuring your S corporation's compliance with state and federal laws is an ongoing process. It begins with properly electing S corporation, or S corp., status and continues throughout the corporation's life. Understanding the fundamentals will help you identify areas where your S corp. might need to take action to become compliant with applicable laws.

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Qualifying as an S Corp.

S corp. status is a special tax status that allows corporations to pass profits through to shareholders, who pay taxes on them individually, instead of paying taxes both as a corporation and again as individual shareholders. Not all corporations meet the qualifications of S corporations. The U.S. tax code sets out detailed requirements for when a business can elect S corp. status. Under these requirements, the corporation must:

  • Be owned solely by individuals and specified trusts and nonprofit organizations
  • Be owned exclusively by U.S. citizens and residents
  • Have 100 or fewer shareholders
  • Not have multiple classes of shares
  • Allocate profits and losses according to each shareholder's percentage interest in the corporation
  • Obtain the consent of all the shareholders to the S corp. election

Electing S Corp. Status

A common mistake corporations make is assuming that because they meet the S corp. requirements and want to be an S corporation, they are an S corp. This is not the case. Just meeting the S corp. qualifications does not automatically make a corporation an S corp. To become an S corporation, the corporation must affirmatively opt-in to S corp. status by filing Election by a Small Business Corporation (Form 2553) with the Internal Revenue Service (IRS).

Complying with Tax Laws

Once a corporation properly elects S corp. status, it must comply with federal and state laws governing corporations. All corporations must file annual reports and pay any taxes due, both with the IRS and with each state where it does business. Other tax obligations vary depending on the S corporation's structure. For example, an S corp. with employees must withhold certain taxes like federal income tax and Social Security tax and report its withholdings on a quarterly basis.

Complying with State Corporate Code

In addition to tax-related obligations, all S corporations must also abide by the laws governing corporations in the state where the S corp. was formed. S corporations are still corporations and subject to these laws just as every other corporation is. Every state handles things a little differently, but in most cases, S corporations must do at least the following:

  • File articles of incorporation with the state agency that regulates businesses to form a corporation and pay the associated filing fees.
  • Complete an annual report providing the state with an update on corporate information and pay the associated filing fees.
  • Hold annual shareholder and board of director meetings and keep a written record of the outcome.

Maintaining S Corp. Records

It is important for S corporations to create and maintain records of their structure, management, finances, and actions. State laws require that certain records be kept, but corporations should strive to exceed the minimal record-keeping requirements.

Having reliable detailed records helps protect a corporation in the event of a lawsuit because those records provide documentation that supports the corporation. For example, if there is a dispute over who owns how many shares of the corporation, a corporation that has well-kept records will easily be able to prove the correct share distribution.

Shareholder and board meeting minutes, profit and loss reports, account statements, a capitalization table, and shareholder and board resolutions are a few of the corporate records that are important to create, save, and maintain.

Considering Unique Components of Corporation

Corporations evaluating their compliance should also consider whether the unique components of their business subject them to additional laws and regulations. A corporation that sells vitamins, for example, is subject to FDA and state laws governing food and drug safety that would not apply to a graphic design company.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.