What is an S corporation?
It is a corporation whose profits and losses are taxed to its owners on their personal income tax returns in lieu of being taxed as a corporation. An S corporation files a tax return on Form 1120S. Then, the Schedule K-1 is distributed to shareholders.
Are you eligible?
The IRS has 8 qualifications, including:
- It must be a domestic corporation
- It must have no more than 100 shareholders
- Shareholders are individuals, estates, exempt organizations
- No foreign investors
- It has only one class of stock
- It must use a December 31 year-end.
Why elect S corporation status?
S corporation status has two benefits.
- It avoids the double taxation.
- It separates the owners from the business and allowing the owners to be employees
How to elect S corporation status?
By filing IRS form 2553 with the IRS. However, the election must be made no more than 2 months and 15 days after the beginning of the tax year when the election is to go into effect.