S corporations represent a unique business structure in the United States, offering a hybrid approach to taxation and liability. At their core, S corporations are corporations that have elected to pass their income, losses, deductions, and credits directly through to their shareholders for federal tax purposes. This pass-through taxation is the defining characteristic of an S corp, allowing them to potentially avoid the double taxation that traditional C corporations often face. Shareholders then report these items on their personal tax returns, paying taxes at their individual income tax rates. While the primary benefit is avoiding double taxation, it’s important to note that S corporations may still be responsible for taxes at the corporate level on certain built-in gains and passive income.
Understanding S Corporation Eligibility
To qualify for S corporation status with the Internal Revenue Service (IRS), a business must meet specific criteria. These requirements ensure that only certain types of businesses can take advantage of the S corp election. The stipulations include:
- Domestic Corporation: The entity must be incorporated and operate within the United States.
- Allowable Shareholders: Ownership is restricted to individuals who are U.S. citizens or residents, certain types of trusts, and estates. Notably, partnerships, corporations, and non-resident alien shareholders are not permitted to be S corporation shareholders. This restriction keeps the ownership relatively straightforward for tax purposes.
- Limited Number of Shareholders: The corporation cannot have more than 100 shareholders. This limit is designed to keep S corporations within the scope of smaller businesses.
- One Class of Stock: S corporations are only allowed to issue one class of stock. This simplifies the capital structure and prevents complexities in income allocation.
- Not an Ineligible Corporation: Certain types of corporations are ineligible to become S corporations. These include specific financial institutions, insurance companies, and domestic international sales corporations. These exclusions are based on the specific nature of these businesses and their existing tax structures.
Electing S Corporation Status
For a corporation to officially become an S corporation, it must file Form 2553, “Election by a Small Business Corporation,” with the IRS. This form must be signed by all shareholders, signifying their agreement to the S corp election. Form 2553 is a crucial document that formally notifies the IRS of the corporation’s intent to be taxed under Subchapter S of the Internal Revenue Code. The Instructions for Form 2553 PDF provide detailed guidance on completing the form, including all necessary information and where to file it. Careful adherence to these instructions is essential for a successful S corp election.
S Corporation and Shareholder Filing Requirements
S corporations and their shareholders have specific tax filing obligations. These are summarized in the charts below:
Chart 1 – S Corporation Filing Obligations
| Tax Liability | Applicable IRS Form | Relevant Instructions |
|---|---|---|
| Income Tax | Form 1120-S, U.S. Income Tax Return for an S Corporation Form 1120-S (Schedule K-1) PDF |
Instructions for Form 1120-S PDF Instructions for Form 1120-S Sch. K-1 PDF |
| Employment Taxes (Social Security, Medicare, Income Tax Withholding, FUTA) | Form 941, Employer’s Quarterly Federal Tax Return or Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees (for farm employees) Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return |
Instructions for Form 941, Employers QUARTERLY Federal Tax Return PDF Instructions for Form 943, Employers Annual Federal Tax Return for Agricultural Employees PDF Instructions for Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return PDF |
| Excise Taxes | Refer to the Excise tax webpage |
Chart 2 – S Corporation Shareholder Filing Obligations
| Tax Liability | Applicable IRS Form
