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What Are the Different S Corporation Requirements?

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  • Written By: Renee Booker
  • Edited By: E. E. Hubbard
  • Last Modified Date: 22 March 2014
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An S corporation is a type of corporation that is allowable under the rules of the United States Internal Revenue code that allows the corporation to pass income, losses, deductions, and credits through to the shareholders. The basic S corporation requirements include: the corporation must be a domestic corporation; it must have only allowable shareholders; there cannot be more than 100 shareholders; it can only have one class of stock; and it cannot be one of a number of ineligible types of corporations. If the corporation meets all the requirements, then it may be formed as an S corporation and may complete its tax returns accordingly.

Corporations fall into two categories — C corporations and S corporations. A C corporation is essentially taxed twice because both the corporation's profits and the shareholders' dividends are taxed. An S corporation, on the other hand, is only taxed once because everything is passed down to the shareholders. S corporation requirements are located in Subchapter S of Chapter 1 of the Internal Revenue Code. Although there are a number of legal steps necessary to form an S corporation, the corporation must first meet the requirements under the Code.

Among the requirements, the S corporation must be a domestic corporation, meaning it cannot have its principal office in another country. In addition, the shareholders must be either individuals or certain allowable trusts or estates. Ineligible shareholders include partnerships, separate corporations, or non-resident aliens.

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There are additional S corporation requirements regarding the number of shareholders and type of stock allowable. An S corporation is limited to 100 shareholders and may only issue one class of stock. Spouses and some family members are automatically treated as one shareholder. A class of stock refers to the rights and characteristics of the shares issued to shareholders. When more than one class of stock is issued, the shareholders may have different rights, such as differing rights to vote.

The S corporation requirements forbid certain types of corporations from forming an S corporation. Among the types of corporations that cannot form an S corporation are insurance companies, certain financial institutions, and domestic international sales corporations. If a corporation meets all the S corporation requirements and wishes to be taxed accordingly, the shareholders must file Form 2553-Election By A Small Business Corporation with the Internal Revenue Service. All shareholders must sign the form and it must be completed by the 15th day of the third month for the tax year in question.

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