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.

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.

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.

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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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References

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How to Dissolve an S-Corp but Keep an LLC

Businesses that can become an S corporation are limited to corporations and entities that can choose to be taxed as corporations, such as limited liability companies. An S-Corp is a business with a special tax status that allows its shareholders to include the business' profits and losses on their personal returns. In exchange, the IRS does not tax the business itself. An LLC is formed under state law, which is distinct from federal tax law. When an LLC elects to be taxed as an S-Corp, it remains an LLC in every respect, except for taxation. Therefore, when a business terminates its S-Corp standing with the IRS, this will not affect its standing as an LLC.

The Termination of S Corp Status

S corporation status is an IRS-sanctioned tax designation that allows a corporation to retain liability protection for its shareholders but lets them be taxed like a partnership.This means that the S corporation is not taxed directly, but its shareholders add their share of the business’s annual income and losses to their personal returns and personally pay taxes on those amounts. To choose this status, the corporation must have fewer than 100 shareholders and cannot have any nonresident alien shareholders. It can only have one class of stock and cannot participate in certain industries. A corporation can have its S-corp status rescinded by the IRS or its shareholders can choose to give it up.

When Can I Revoke an Election in an S Corporation?

An S corporation is a business entity that has applied to the IRS for a special tax status. In exchange for complying with certain restrictions, the S-corp does not pay taxes. Instead, the corporate shareholders divide the business’s profits based on the stock each owns and include the income on their personal returns. The business can choose to revoke the election, but the shareholders must follow IRS rules and procedures to do so.

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