WHAT’S A SUB CHAPTER S CORPORATION?
A Subchapter S Corporation (S Corp) is a business entity that provides limited liability protection while allowing for pass-through taxation. Unlike C Corporations, which are subject to double taxation, an S Corporation allows profits and losses to pass through to shareholders, who report them on their individual tax returns.
This structure is particularly attractive to small business owners seeking corporate protections, tax efficiency, and flexible management without the heavy tax burdens faced by larger corporations. However, businesses must meet specific IRS requirements and formally elect S Corporation status to qualify.
Forming an S Corporation
- Pass-Through Taxation – Unlike a C Corporation, an S Corporation’s income is only taxed at the individual level, eliminating double taxation and reducing the overall tax burden.
- Limited Liability Protection – Shareholders are not personally responsible for business debts or legal claims, ensuring their personal assets remain protected.
- Self-Employment Tax Savings – Shareholder-employees can split their earnings between salary and profit distributions, reducing tax liabilities while remaining compliant with IRS regulations.
- Enhanced Business Credibility – A legally recognized corporate structure helps attract investors, secure business loans, and build trust with clients and partners.
Easy Ownership Transfers – Ownership can be transferred through stock sales, allowing the business to continue operating even as leadership changes.
Who Qualifies for S Corporation Status?
Not all businesses can elect to be an S Corporation. The IRS has strict eligibility requirements that must be met:
- The corporation must be a domestic entity, meaning it must be incorporated within the United States. Certain businesses, such as banks, insurance companies, and international sales corporations, do not qualify.
- The business must have no more than 100 shareholders. However, certain family members, including spouses, may be counted as a single shareholder, making it easier for some businesses to qualify.
- Only specific individuals and entities can hold shares in an S Corporation. Shareholders must be U.S. citizens or permanent residents. Trusts and estates may qualify, but corporations and partnerships cannot hold shares.
- An S Corporation can have only one class of stock. While voting rights may differ, the corporation cannot issue preferred stock or multiple stock classes.
- If a corporation meets these requirements, it can elect Subchapter S status, allowing it to enjoy tax benefits while maintaining the operational structure of a traditional corporation.
How to Form an
S Corporation?
Step 1: Incorporate as a C Corporation
Choose a business name and verify availability through an entity lookup. File Articles of Incorporation with the state’s business registration office. Appoint directors and officers to manage corporate operations. Adopt corporate bylaws to define governance policies.
Step 2: Obtain an Employer Identification Number (EIN)
Required for tax filings, business bank accounts, and hiring employees. Issued by the IRS upon request.
Step 3: Elect S Corporation Status by Filing IRS Form 2553
Must be submitted within 75 days of incorporation or by March 15 of the desired tax year. Approval from the IRS confirms S Corporation status.
Step 4: Comply with Ongoing IRS and State Requirements
- File Form 1120-S annually to report corporate income.
- Provide Schedule K-1 forms to shareholders detailing their share of profits and losses.
- Hold regular corporate meetings and maintain accurate records.
- Failure to comply with IRS regulations may result in the termination of S Corporation status, reverting the business back to a C Corporation for tax purposes.
S Corporations VS
Other Business Structures
An S Corporation is often compared to a C Corporation and an LLC due to similarities in structure and legal protections. However, key differences make each entity unique.
S Corporation vs. C Corporation
- A C Corporation faces double taxation, as profits are taxed at both the corporate and individual levels.
- It has more flexibility in ownership and stock structure, making it the preferred choice for large businesses looking to attract venture capital or go public.
- An S Corporation, in contrast, allows for pass-through taxation, reducing the tax burden on business owners but is restricted to 100 shareholders and can issue only one class of stock.
S Corporation vs. LLC
- An LLC (Limited Liability Company) also benefits from pass-through taxation but has fewer formal requirements than an S Corporation.
- IWhile LLCs offer management flexibility and profit distribution flexibility, they do not provide the same credibility and structured governance as S Corporations.
- Self-employment tax is typically higher for LLC owners, as LLC members must pay self-employment tax on all earnings, whereas S Corporation shareholders can classify some income as distributions, which are not subject to self-employment tax.
For business owners seeking tax efficiency, liability protection, and a formal corporate structure, an S Corporation is often the best choice.
Why Should You Form an S Corporation Now?
Electing S Corporation status early in your business’s lifecycle allows you to take advantage of tax benefits from the start. Businesses that qualify for pass-through taxation can reduce their overall tax burden while maintaining the structure and liability protections of a corporation.
Additionally, forming an S Corporation enhances business credibility and ensures the company is set up for long-term growth. Whether you plan to attract investors, expand operations, or transition ownership, having a structured corporate framework provides a strong foundation for success.
How We Can Help You Get Started
We provide comprehensive assistance in forming and maintaining your S Corporation, including:
- Filing Articles of Incorporation and ensuring state compliance
- Preparing and submitting IRS Form 2553 to elect S Corporation status
- Drafting corporate bylaws and governance documents
- Providing ongoing compliance guidance to maintain S Corporation benefits
If you’re ready to establish your S Corporation, we can help you navigate the legal and tax complexities, ensuring a smooth and successful setup.
Perform an Entity Lookup to check name availability and begin the incorporation process.