S Corporations

Advantages of S Corporations

When a corporation elects to be Subchapter S Corporation it can avoid double taxation by not paying tax at the corporation level:

• Instead, the corporation income flows through to the income tax returns of the individual shareholders
• Shareholders report the income or loss even when income not distributed to them
• This flow-through may nevertheless be an advantage under some situations

Disadvantages of S Corporations

Rules involving the criteria needed to be met to be taxed as a Subchapter S Corporation can change to one’s detriment, creating another potential disadvantage of needing to stay abreast of rule changes. Some of the rules to watch out involve:

• Corporation must be incorporated in the US and have only one class of stock
• Number of shareholders is limited to no more than 100 shareholders
• Shareholders are limited to individuals, estates, qualified trusts, and similar entities
• No foreign ownership of shares
• The corporation cannot have excessive amounts of passive income

In order to become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation signed by all the shareholders.