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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.

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