An S Corporation is merely a corporation which has elected a special tax status. This tax treatment permits the income of the corporation to be treated like the income of a partnership or sole proprietorship in that the income is "passed through" to the shareholders. Thus, shareholders report the income or loss which is generated by an S Corporation on their individual tax returns. Under these circumstances the "double taxation" potential is avoided.
In order to be considered an S Corporation, the stockholders of a properly filed corporation must elect such status within 75 days of formation for the current tax year, or at any time during the preceding tax year. This election is made by filing Form 2553 with the IRS.
To qualify for S Corporation status:
- Must be a domestic corporation.
- Only one class of stock.
- Not more than 35 stockholders.
- Stockholders must be individuals, estates or certain trusts.
Incorporate - Need To Know
- A corporation's life is not dependent upon its members. A corporation possesses the feature of unlimited life. If an owner dies or wishes to sell their interest the corporation will continue to exist and do business.
- Retirement funds and qualified retirement plans (like 401k) may be set up more easily with a corporation.
- Ownership of a corporation is easily transferable.
- Capital can be raised more easily through the sale of stock.
LLC - Need To Know
- Owners have limited liability from business debts and obligations.
- Owners can report their share of profit and loss on their individual tax returns without filing a separate corporate tax return.
- LLCs can be owned by individuals or other companies.
- LLCs do not have the same corporate formailities as a corporation.