Like many business owners, you may have structured your business as an S corporation because of the tax benefits it offers. An S corporation provides the same limited liability as a traditional C corporation, but it generally avoids the double taxation associated with a C corporation. You and the other shareholders (if any) pay income taxes on corporate income directly.
Once you have an S election in place, it’s important to make sure you avoid taking any action that would put the election in jeopardy. Your corporation’s failure to meet certain tax law requirements on an ongoing basis could result in the IRS’s termination of its S corporation status.
Ownership
An S corporation generally may not have a corporate shareholder. (Exception: An S corporation may be wholly owned by another S corporation.) All shareholders generally must be individuals, estates, certain trusts, or tax-exempt 501(c)(3) charitable organizations. However, a partnership may hold S corporation stock as a nominee for an eligible shareholder. Nonresident aliens may not be shareholders. A foreigner, non-citizen, resident alien may be an S shareholder, but you need to be careful because there are special qualification requirements, including requirements regarding physical presence in the United States.
Number of Shareholders
An S corporation may not have more than 100 shareholders. For purposes of this limit, the IRS treats a husband and wife as one shareholder, as it treats certain other related individuals.
S Corporation Stock
An S corporation may have only one class of stock. Generally, a corporation has only one class of stock if all outstanding shares of the corporation’s stock confer identical rights to distribution and liquidation proceeds.
Many small business owners have troubles with this requirement, by not making distributions to owners according to the ownership percentages.
For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.