An S-Corporation can provide significant Federal income tax savings over a C-Corporation. A common question that arises is, “If the benefits are so obvious, why aren’t all corporations S-Corps?”
Due to the benefits, the IRS places restrictions on S-Corporation ownership, including the types of shares that the corporation can issue and the types of shareholders who can own them. All restrictions must be met and in place at all times, and they are as follows:
1. The corporation must be a domestic corporation (formed in the United States).
2. The corporation may have only ONE class of stock (although voting and non-voting common stock may be acceptable).
3. The corporation may not have any more than 100 shareholders (certain family trusts can be considered ‘one’ shareholder).
4. Shareholders of the corporation may ONLY be individuals, certain trusts, and estates.
5. Partnerships, non-resident aliens, and other corporations may NOT be shareholders of the corporation (one S-Corp may, however, be a wholly-owned subsidiary of another, if a Q-Sub election is made).
6. The corporation CANNOT be an ineligible corporation (certain types of businesses, including financial institutions, insurance companies and IC-DISCS are excluded from seeking S-Corp status).
The restrictions result in many companies becoming ineligible for S-Corporation status for failing to (or simply not wanting to) adhere to one or more of these rules. If you are considering forming a corporation and are looking into filing the ‘S’ election, discussing the ramifications with knowledgeable legal and accounting professionals can save you significant time, money and heartache down the road.
Learn more about the differences between C-Corporations and S-Corporations, and about the tax benefits of an S-Corporation (over a C-Corporation).
If you are interested in more detail related to your situation it is best to speak with an attorney.
Founders Legal’s Business and Corporate Practice group is committed to assisting businesses in navigating the complexities of C-Corporations and S-Corporations. With a professional understanding of the tax benefits, restrictions, and eligibility requirements of each, we are prepared to guide you through the decision-making process. Whether you are considering forming a corporation or exploring the ‘S’ election, our experienced team is here to provide knowledgeable assistance tailored to your situation. Contact us for a consultation to discuss the best corporate structure for your business.
