Watching your small business begin to prosper into a corporation is a dream come true for hard working entrepreneurs! Unfortunately, as your corporation grows, so does your tax rate. There are two types of corporations for tax purposes C Corporations & S Corporations. This article will cover what S corporation is. The S Corp is a business entity that offers significant tax advantages while still preserving your ownership flexibility. S corporations are businesses that elect to pass all corporate income matters directly to the shareholders for federal tax purposes. All shareholders must meet strict guidelines to ensure the requirements are met on a federal basis. Gains and losses flow through on their personal tax returns. The reports are assessed at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
To qualify for S corporation status, the corporation must meet the following requirements:
- Be a domestic corporation
- Have only allowable shareholders
- May be individuals, certain trusts, and estates
- May not be partnerships, corporations or non-resident alien shareholders
- Have no more than 100 shareholders
- Have only one class of stock
- Not be an ineligible corporation
