An S corporation is a specific type of corporation, which provides all the advantages of a business corporation structure. It allows profits and losses to be passed to one or more shareholders. The shareholders of S corporations are much more limited; the owners can only be US persons or foreigners residing in the country. It has a limited number of shareholders, which must be less than 100 shareholders. An S corporation allows the owners to be treated as employees of the corporation, this can greatly reduce an entrepreneur's tax burden in the right circumstances.
An S corporation is not a type of entity but a special tax treatment, whereby the corporation pays taxes through its shareholders. By not paying taxes at the corporate level, everything goes directly to the shareholders (income, expenses, amortization, gains, and losses). By passing everything to the shareholders, the double taxation to which general corporations are subject to is avoided.
To apply and convert your corporation to an S corporation, the following requirements must be met:
- The corporation must have less than 100 shareholders.
- All shareholders must be individuals, or certain types of trusts.
- All shareholders must be US citizens or resident aliens.
- The corporation must be incorporated in the United States or be an unincorporated entity that elects to be taxed as domestic.
- The corporation must have only one class of stock.
