S corporations are a great business structure for small and medium-sized companies, as they offer limited liability and avoid double taxation.
But getting this tax status isn’t easy. Misunderstanding or missing a single requirement could result in potential penalties, or even revoking your S corp status.
Ahead, you’ll learn the essential criteria and steps to follow to leverage S corp status, without stumbling into common pitfalls.
What is an S corporation (S corp)?
An S corporation, or S corp, is a modified form of corporation under Subchapter S of Chapter 1 of the US Internal Revenue Code, which is not subject to federal corporate tax. It is also a tax status for other business entities; for example, limited liability companies may elect to be taxed as S corps, even though their entity type is LLC.
Like a sole proprietorship or partnership, an S corp is chiefly defined by its pass-through tax status—it passes corporate income, losses, deductions, and credits through to shareholders for purposes of federal income tax.
Like C corporations (C corps), limited liability companies (LLCs), and limited liability partnerships (LLPs), S corps are legal entities distinct from ownership, meaning shareholders’ personal liability for business debt and legal damages is limited. In other words, their personal assets cannot be reached by creditors or litigants.
What are the filing requirements for an S corp?
Not every corporation can receive S corp status. The IRS has strict requirements for S corps. They’re limited to smaller businesses located in the US. To become an S corporation, you must meet certain criteria and make an election to be taxed under Subchapter S of the Internal Revenue Code.
To start an S corp, your small business must first be established as a corporation by filing articles of incorporation with the appropriate state governing authority, and pay the applicable filing fee.
Once incorporation is completed, shareholders must sign Form…
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