S Corporation

An S corporation is a regular corporation with special tax attributes. Corporations may obtain conduit entity tax status by making a valid election per Subchapter S of the Internal Revenue Code of 1986. The S corporation retains the legal characteristics of the corporate form (limited liability, free transferability of interests, continuity of life, and centralized management) while obtaining taxation characteristics similar to those of a partnership.

Thus, a corporation making this election would be exempt from federal income tax. Its shareholders would include in their income their share of the corporation's separately stated items of income, including corporate capital gains, deductions, losses, and credit and their share of non-separately stated income or loss. Management and operating expenses of an S corporation are reported on Form 1120S, Income Tax Return from an S Corporation.

To qualify as an S corporation, a corporation:

  1. Must be a domestic corporation,
  2. May not have more than 35 shareholders (married individuals who are both shareholders are deemed to be one shareholder for S corporation status)
  3. Must have as its shareholders only individuals, estates, tax-exempt organizations, and certain trusts
  4. Cannot have a nonresident alien as a shareholder
  5. Must have only one class of stock outstanding
  6. Must have the consent of all shareholders to the election of S corporation status

Every qualifying requirement must be met at the time of the election and at all times thereafter. The S corporation election terminates immediately when one or more of the qualifying characteristics ceases to exist. As of the date of termination, the corporation becomes a taxable corporate entity. The election is only for federal tax purposes. Certain states do not recognize this election for state income tax purposes. You should consult the state taxing authority to determine whether the S corporation election is valid for your state's income tax system.