S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
To qualify for S corporation status, the corporation must meet the following requirements:
- Be a domestic corporation
- Have only allowable shareholders
- May be individuals, certain trusts, and estates and
- May not be partnerships, corporations or non-resident alien shareholders
- Have no more than 100 shareholders
- Have only one class of stock
- Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
Incorporating your business can also provide limited liability protection to the owners. Personal assets will be protected by the corporate veil if a business cannot pay its debts or if a judgment arises from litigation. Laws concerning corporate liabilities differ from state to state, so it is important to consider the state you incorporate and refer to the laws of the state to determine the best entity type for your risk tolerance.
Donovan Niles 