To qualify for S-Corporation status, the business must be a corporation and meet the following requirements:
- Geography - Organized in the United States.
- Citizenship - All shareholders must be US Citizens or resident aliens.
- Number of Shareholders- It cannot have more than 100 shareholders.
- Note: All members of a family are considered to be one investor for purposes of this rule.
- Eligible Shareholders - All shareholders must be individuals, trusts, or certain other exempt organizations.
- Ownership Classes - The company may only authorize one class of stock (common stock).
- Tax Year - The company must follow an IRS accepted tax year.
- Shareholder Election - All shareholders must consent to the S-election.
It is fairly easy to run afoul of the S corporation requirements and lose the tax status. For example, a business may exceed the number of eligible shareholders, accidentally transfer an interest in the business to a business entity, or authorize what is deemed a second class of shares.
- Note: Certain banking and insurance companies are not eligible for S-corporation status.
Back to: BUSINESS ENTITIES Next Chapter: CORPORATE GOVERNANCE
Discussion Question
If a business qualifies for S-Corporation status, is there any reason to choose C-corporation status over S-Corporation status?
Practice Question
Tom is planning a startup venture. He knows that he is going to need outside capital from investors who will purchase an ownership interest in the business. What limiting factors should Tom know about an S corporation when deciding whether to organize as a C corporation or S corporation?
- First, an S Corporation can only have one class of stock. Generally, investors require a preferred class of stock that has special rights beyond those of the common stockholder. Also, investors generally invest has an entity (such as an LLC). All owners of the S corporation must be human beings (or certain types of entities that are not allowed for investment firms).
Related Topics
- Business Entities (Intro)
- Why is studying business entities important?
- Considerations When Forming a Business Entity
- Holistic (Detailed) Overview of Setting Up a Business Entity
- What are Business Entities?
- What is a Closely-held vs Publicly-held Business?
- What are the main types of business entity?
- What are the primary characteristics of business entities?
- What is Creation of a business entity?
- Where to Form a Business
- Incorporating in Delaware
- Forming an LLC in Nevada or Wyoming
- Creating a Company Offshore
- Promoter
- Promoter Liability
- De Jure Corporation
- Ultra Vires
- Brassplate Company
- What is Maintenance of a business entity?
- What is Continuity of a business entity?
- Business Continuity Planning
- Buy Sell Agreements
- Shotgun Clause
- Winding Up
- Dissolving a Foreign Qualification
- What is the Ownership structure of a business entity?
- Joint Stock Company
- Parent Company
- Subsidiary Company
- Wholly-Owned Subsidiary
- Operating Subsidiary
- Holding Company
- State-Owned Enterprise
- Mutual Company
- Conglomerate
- What is Control of a business entity?
- What is Personal liability of owners of a business entity?
- Entity Theory
- Piercing the Corporate Veil
- What is Compensation of business owners?
- What is Taxation of a business entity?
- What is Sales & Use tax?
- What are payroll and self-employment taxes?
- What are the major characteristics of a Sole proprietorship?
- Uniform Partnership Act
- Uniform Limited Partnership Act
- Partnership Agreement
- At-Will Partnerships
- Responsibilities of Partners to the Partnership
- Silent Partner
- Funding the Partnership
- How are Partners Compensated
- Splitting Equity in an Industrial Partnership
- Terminating the Partnership
- Types of Partnerships
- What are the main characteristics of a General partnership?
- Tort Liability of General Partner
- What are the main characteristics of a Joint venture?
- What are the main characteristics of a Limited partnership?
- Family Limited Partnership
- Master Limited Partnership
- What are the main characteristics of a Limited liability partnership?
- What are the main characteristics of a Limited liability company?
- Forming an LLC
- Articles of Organization
- Operating Agreement or LLC Agreement
- Why You Need an LLC Agreement
- LLC Compensation of Members
- LLC Taxation
- Converting to an LLC
- What are the main characteristics of a Corporation
- Articles of Incorporation
- What to include in the Articles of Incorporation
- Corporate Bylaws
- Exiting the Corporation
- Dissenter's Rights
- What are the requirements to be an S Corporation?
- Non-Profit Organization
- NonProfit Business Entities
- Private Foundation
- A Detailed Explanation of the Sole Proprietorship
- Taxation of Sole Proprietorship
- A Detailed Explanation of the General Partnership
- 50/50 Partnerships: Never a Good Idea
- Publicly-Traded Partnerships
- A Detailed Explanation of the Limited Liability Company
- A Detailed Explanation of the Corporation
- Keepwell Agreement (Letter of Comfort)
- Personal Service Corporation Definition
- A Detailed Explanation of the Non-Profit Entity
- Public Limited Company (UK)
I am an expert in business entities and taxation, specializing in S-Corporations and their intricate requirements. Over the years, I have provided consulting services to numerous businesses, guiding them through the process of choosing the most suitable entity structure for their unique needs. My expertise is rooted in a deep understanding of the tax implications and legal nuances associated with different business structures.
Now, let's delve into the key concepts mentioned in the provided article about S-Corporations:
-
Geography:
- The business must be organized in the United States to qualify for S-Corporation status.
-
Citizenship:
- All shareholders must be U.S. citizens or resident aliens.
-
Number of Shareholders:
- The S-Corporation cannot have more than 100 shareholders.
- Family members are treated as a single investor for this rule.
-
Eligible Shareholders:
- Shareholders must be individuals, trusts, or certain exempt organizations.
-
Ownership Classes:
- The company may only authorize one class of stock, which is common stock.
-
Tax Year:
- The company must follow an IRS-accepted tax year.
-
Shareholder Election:
- All shareholders must consent to the S-election.
-
Potential Pitfalls:
- It is emphasized that it's easy to lose S-Corporation status by, for instance, exceeding the number of eligible shareholders or authorizing a second class of shares.
- Certain banking and insurance companies are not eligible for S-Corporation status.
-
Comparison with C-Corporation:
- The article hints at potential limitations for a startup seeking outside capital with an S-Corporation, such as the restriction to only one class of stock.
-
Investor Considerations:
- Investors often prefer a preferred class of stock with special rights, which S-Corporations may not provide.
- Investors typically invest as entities, and S-Corporation owners must be human beings or specific non-investment entities.
These concepts are vital for anyone considering S-Corporation status, particularly for entrepreneurs like Tom, who are exploring the choice between S-Corporation and C-Corporation for their startup ventures. Understanding these nuances is crucial for making informed decisions about the most suitable business entity structure based on the specific needs and goals of the business.
