A traditional corporation (or C-corporation), is taxed as a separate entity, which leads to double taxation of corporate income and dividends to shareholders. An S-corporation elects to be treated as a pass-through entity (such as a sole proprietorship or partnership) for tax purposes. This means S-corporations are not subject to double taxation. All corporate income is “passed through” directly to the shareholders who include the income on their individual tax returns.
In general, the accounting for an S-corporation is easier than for a C-corporation. There are, however, certain restrictions on S-corporations:
- An S-corporation must not have more than 100 stockholders, and each of them must consent. (A married couple is treated as one stockholder.)
- Each stockholder must be an individual who is a citizen or resident of the United States, or an estate or qualifying trust of such person.
- The corporation can have only one class of stock. (However, voting differences within a class of stock are permissible.) Preferred stock is not allowed.
- The corporation must use the calendar year as its fiscal year unless it can demonstrate to the IRS that another fiscal year satisfies a business purpose.
Corporations wishing to become an S-corporation must file Form 2553 with the IRS. Each corporate stockholder must sign the form, which we can prepare for you.