ELIGIBILTY HOW TO BE AN S-CORP WHY BE AN S-CORP DISADVANTAGES TAX REPORTING & FORMS

There is no limit to how big a business can be and still be an S-corporation but there are some restrictions. 

1. Only individuals, estates and certain trusts may be shareholders. Non-resident aliens and nonhuman entities (e.g. corporations and partnerships) cannot be shareholders.
2. There can only be 75 shareholders (a married couple counts as one).
3. There can only be one class of outstanding common stock. There can be no preferred stock. (Different voting rights do not violate this rule.)
4. The election of S-Corporation treatment must be unanimous.

BACK TO S-CORP

1. Incorporate as provided by law (same as C-corporation)
2. Determine eligibility
3. File FORM 2553 Election by a Small Business (S-Corporation Election) after unanimous election by all shareholders.

BACK TO S-CORP

1. Limited Liability
2. Income taxed as individual, avoids double taxation

If you can raise enough money with 75 of your closest friends, an S-Corporation could be very beneficial. As stated above, the S-Corporation allows the owners to have the limited liability like a regular corporation while treating the business as a partnership for tax purposes. This avoids the double taxation that occurs when corporate profits are taxed and then distributions of dividends are taxed. The S-Corporation is a passthrough entity meaning that income is passed onto the shareholders in the same form it is earned. The best use of an S-Corporation would be for a non-professional business (not a doctor or lawyer) that does not require flexible financing and that might face large lawsuit liabilities.

BACK TO S-CORP

1. In small businesses it can be difficult to obtain financing. Banks will often require a shareholder to be a guarantor (like a co-signer) and the guarantor's liability will no longer be limited to his investment. Moreover, there is tax benefit for this extra liability like there would be in a partnership.
2. Income must be divided in the same ratio as stock ownership. If an individual is compensated for work put into the business, the pay must have employment taxes taken out.
3. The formalities of business (directors, officers, etc) must be followed to insure that limited liability continues. If these are not followed the "corporate veil" may be pierced in a lawsuit, exposing owners to unlimited liability.

BACK TO S-CORP

• Income for the corporation is reported on the FORM 1120S (S-Corporation Return) for ordinary income and associated schedules for other types of income.
• Shareholders receive FORM 1120S Schedule K-1 reporting their respective share of income/loss.
• Shareholders report their respective share of income or loss on their personal taxes.
• FORM 1120S Schedule D

BACK TO S-CORP BACK TO TAXES AND BUSINESS DECISIONS