Small Business Corporations (S Corporations)
Small closely held corporations may elect to be treated in a manner similar to partnerships. In effect, all the earnings or losses of the corporation are passed through to the shareholders. This results in no corporate-level tax; however, the individuals are taxed on their share of the corporate earnings regardless of whether the corporation actually distributes the earnings to them.
Eligibility
To qualify as a small business corporation, the following requirements must be met:
Qualified Corporation
The corporation must be a domestic corporation. An S corporation may own any interest in a C corporation (even 100%), but the S corporation may not file a consolidated tax return with the C corporation. An S corporation may also create a qualified S subsidiary in which it owns 100% of the stock; the two S corporations would file as one entity for tax purposes.
Eligible Shareholders
- Eligible shareholders must be an individual, estate, or certain types of trusts.
- An individual shareholder may not be a nonresident alien. (Note: Mexicans and Canadians can be S corporation shareholders.)
- Qualified retirement plans, trusts, and 501(c)(3) charitable organizations may be shareholders.
- Neither corporations nor partnerships are eligible shareholders.
- Grantor and voting trusts are permissible shareholders.
Shareholder Limit
There may not be more than 75 shareholders. A husband and wife are counted as one shareholder.
One Class of Stock
There may not be more than one class of stock outstanding. However, differences in common stock voting rights are allowed. Preferred stock is not permitted.
