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"S" Corporations

In General: The “S-Corporation” follows the same state formalities as does a C-corporation (i.e. filing Articles of Incorporation and paying state fees). However, an S-Corporation must make a special tax election using IRS Form 2553. The “S” comes from subchapter S of the Internal Revenue Code which controls the method of taxing profits and operations.

No Double Taxation: A traditional corporation, known as a C-corporation, is taxed as a separate entity, leading to double taxation. An S-corporation, on the other hand, is a corporation that elects to be treated as a pass-through for tax purposes. S-corporations are thus not subject to double taxation. Therefore, a shareholder's individual tax returns will report the income or loss generated by an S corporation. Moreover, the accounting for an S-corporation is generally easier than for a C-corporation.

Self-Employment Tax Savings: In an S-corporation, profits are treated as dividends to the owner and are thus considered unearned income and not subject to self-employment taxes. This can be a significant savings as self-employment taxes are approximately 15% and can add thousands of dollars to your tax bill. Only earnings actually paid out to an owner as compensation for services are subject to self-employment taxes.

Some Restrictions Placed on S-Corporations:

  • The S-corporation must not have more than 100 stockholders.
  • 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 must maintain a single class of stock.
  • The corporation must generally use the calendar year as its fiscal year.

Electing to be an S-Corporation: A “new” corporation wishing to become an S-corporation must file form 2553 with the IRS and may also need to file with the State. These forms generally must be filed no later than 75 days after the corporation has began conducting business as a corporation, acquired assets, or has issued stock to shareholders (whichever is earlier). An “existing” corporation which desires to become an S corporation must make it’s election by March 15 if the corporation is a Calendar year taxpayer in order for the election to take effect for the current tax year.

Annual Tax Filings: The S-corporation files its own annual corporate tax forms each year using IRS form 1120S. Requisite State forms may also be required.

Call us at 708-562-6900 to help you determine the best structure for your business.