S Corporation

An S Corporation is a company that elect to be taxed as a small business corporation pursuant to the Internal Revenue Code. Despite the name S “Corporation,” both corporations and limited liability companies can elect to be taxed as a so-called “S” Corporation. A company must file a Form 2553 with the IRS in order to make the election to be taxed as such. Electing S Corp tax status allows a company to be taxed as a pass-through entity, like a partnership.  Instead of paying a corporate tax rate on income, like a C Corporation would, income passes through the entity and is only reflected on the owners’ personal tax returns for tax purposes. An S Corporation election is a popular choice among startup corporations as it prevents double taxation of corporate income. There are restrictions placed on S Corporations that may affect the desirability of the election. S Corporations may only have up to one hundred shareholders, may only have one class of stock, and cannot have shareholders that are partnerships, corporations or non-resident aliens. If a startup company plans to attract major investors with an offering of preferred stock or to attract investment from outside of the U.S., then an S Corporation election may not be an option.