S corporations are corporations that elect to pass corporate income, losses, deductions, and credit to their shareholders for federal tax purposes. Instead of double taxation, like C corporations, S corporations only incur single taxation and can be most compared to the partnership in this sense.
- A S corporation must be an eligible entity such as a domestic corporation or limited liability company (which has elected to be taxed as a corporation).
- The S corporation can have only one class of stock, as opposed to the C corporation that can have multiple levels or classes of stock.
- The limit on shareholders for S corporations is 100. Spouses are automatically treated as single shareholders.
- Shareholders must be U.S. citizens or residents and must be natural persons. This means that a shareholder cannot be a corporation or a partnership.
- Finally, profits and losses must be allocated to the shareholders proportionately to each one's interest in the business.
As far as the rest of the corporate formalities, the S corporation generally has the same requirements as the C corporation.
These include: limited liability protection, classification as a separate legal entity, document filings, corporate structure (shareholders, directors and officers), and finally, the S corporation has the same internal and external corporate formalities such as by laws, stock issuance, meetings, reports and paying annual fees.
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