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:
- Be a domestic corporation. Your business must be incorporated in the United States and you must have filed Form 2553 with the IRS.
- 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.
- 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.
- 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
- 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.