Requirements for an S Corporation - Explained
What is Required to be an S Corporation?
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What are the requirements to qualify as an S corporation?
To qualify for S-Corporation status, the business must be a corporation and meet the following requirements:
- Geography - Organized in the United States.
- Citizenship - All shareholders must be US Citizens or resident aliens.
Number of Shareholders- It cannot have more than 100 shareholders.
- Note: All members of a family are considered to be one investor for purposes of this rule.
- Eligible Shareholders - All shareholders must be individuals, trusts, or certain other exempt organizations.
- Ownership Classes - The company may only authorize one class of stock (common stock).
- Tax Year - The company must follow an IRS accepted tax year.
- Shareholder Election - All shareholders must consent to the S-election.
It is fairly easy to run afoul of the S corporation requirements and lose the tax status. For example, a business may exceed the number of eligible shareholders, accidentally transfer an interest in the business to a business entity, or authorize what is deemed a second class of shares.
- Note: Certain banking and insurance companies are not eligible for S-corporation status.
Back to: BUSINESS ENTITIES Next Chapter: CORPORATE GOVERNANCE
If a business qualifies for S-Corporation status, is there any reason to choose C-corporation status over S-Corporation status?
Tom is planning a startup venture. He knows that he is going to need outside capital from investors who will purchase an ownership interest in the business. What limiting factors should Tom know about an S corporation when deciding whether to organize as a C corporation or S corporation?
- First, an S Corporation can only have one class of stock. Generally, investors require a preferred class of stock that has special rights beyond those of the common stockholder. Also, investors generally invest has an entity (such as an LLC). All owners of the S corporation must be human beings (or certain types of entities that are not allowed for investment firms).
- Business Entities (Intro)
- Why is studying business entities important?
- Considerations When Forming a Business Entity
- Holistic (Detailed) Overview of Setting Up a Business Entity
- What are Business Entities?
- What is a Closely-held vs Publicly-held Business?
What are the main types of business entity?
- What are the primary characteristics of business entities?
- What is Maintenance of a business entity?
- What is Control of a business entity?
- What is Compensation of business owners?
- What is Taxation of a business entity?
- What is Sales & Use tax?
- What are payroll and self-employment taxes?
- What are the major characteristics of a Sole proprietorship?
- Uniform Partnership Act
- Uniform Limited Partnership Act
- Partnership Agreement
- At-Will Partnerships
- Responsibilities of Partners to the Partnership
- Silent Partner
- Funding the Partnership
- How are Partners Compensated
- Splitting Equity in an Industrial Partnership
- What are the main characteristics of a Limited liability partnership?
- What are the main characteristics of a Limited liability company?
- Forming an LLC
- Articles of Organization
- Operating Agreement or LLC Agreement
- Why You Need an LLC Agreement
- LLC Compensation of Members
- LLC Taxation
- Converting to an LLC
- What are the main characteristics of a Corporation
- Articles of Incorporation
- What to include in the Articles of Incorporation
- Corporate Bylaws
- Exiting the Corporation
- Dissenter's Rights
- What are the requirements to be an S Corporation?
- Non-Profit Organization
- NonProfit Business Entities
- Private Foundation
- A Detailed Explanation of the Sole Proprietorship
- Taxation of Sole Proprietorship
- A Detailed Explanation of the General Partnership
- 50/50 Partnerships: Never a Good Idea
- Publicly-Traded Partnerships
- A Detailed Explanation of the Limited Liability Company
- A Detailed Explanation of the Corporation
- Keepwell Agreement (Letter of Comfort)
- Personal Service Corporation Definition
- A Detailed Explanation of the Non-Profit Entity
- Public Limited Company (UK)