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Q.What is an S- Corporation?

A.A general corporation can be either a "C" Corporation or an "S" Corporation. All corporations come into existance as C- corporations. The only difference is the tax election made after the corporation is formed. Once a corporation has been formed, the Board of Directors can hold a meeting and elect to have the corporation treated as an S- Corporation. If all of the shareholders unanimously agree, the corporation can file a 2553 S- Election.

So what is this tax election? A C-corporation is required to pay income tax on taxable income generated by the corporation. Electing Subchapter S status by completing and filing I.R.S. Form 2553 by March 15 is a way to avoid having your corporation treated as a separately taxable entity. This tax election allows the income of the corporation to be treated like the income of a sole proprietorship or partnership such that the shareholder's individual tax returns will report the income or loss generated by the S corporation.

To qualify for "S" corporation status, the corporation must file I.R.S. Form 2553 on or before March 15 and have:

  • only one class of stock (typically "ommon shares");
  • less than 75 shareholders, none of which can be another corporation or nonresident alien; and
  • the written approval of all the shareholders.

Before electing to be treated as either an S-corporation or C-corporation, we suggest you consult with an accountant, or other tax specialist.

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