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Brenda Solorzano
June 24, 2022
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2604
1 min

How can your Business Qualify for S Corporation Status

Have you considered starting a business and want a tax status that will allow you, as an owner, to start small and grow?

Establishing your business as a S corporation could provide a tax advantage for your business. Let's briefly look into what an S corporation is and how to qualify for the status.

What is an S Corporation?

First, let's learn more about what this S Corporation status is. S Corporation, or S-Corp, is a tax designation defined in subchapter "S" of the Internal Revenue Code. An S-Corp is similar to any other corporation. It’s a for-profit company, incorporated under and governed by the same state corporation laws. It must also observe internal practices and formalities: have a board of directors, write corporate bylaws, conduct shareholders’ meetings, and keep minutes of significant company meetings.

The 5 IRS requirements to obtain S Corporation status

To qualify for S corporation status, the corporation must meet the following requirements:

  1. Be a domestic corporation. Your business must be incorporated in the United States and you must have filed Form 2553 with the IRS.
  2. Have only allowable shareholders. The shareholders may be individuals, certain trusts, and estates or certain tax-exempt organizations (501(c)(3)). Shareholders may not be partnerships, corporations or non-resident alien shareholders.
  3. Have no more than 100 shareholders. The ranks of the shareholders must be limited to individuals, nonprofits, trusts, and estates. In other words, no institutional investors.
  4. Have only one class of stock. A corporation is treated as having one class of stock if all outstanding corporate shares of stock confer identical rights of distribution and liquidation proceeds
  5. Be an eligible corporation. Ineligible corporations include certain financial institutions, insurance companies, and domestic international sales corporations.

Book your tax consultation with me to learn more about how to obtain an S Corporation status for your business and understand the benefits it might bring to you and your tax bill!

Legal Researcher and Contributor: Brenda Solorzano, J. D.

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