S Corporations provide the benefits of having a corporation while being taxed as a partnership. S Corporations are treated as corporations under state law and provide the same legal protection as C corporations. The income and deductions of an S corporation flows through to the individual tax return. Income is taxed at the shareholder level and not the corporate level.

When to elect S corporation status

• When shareholders have a higher marginal tax rate when compared to C corporations
• When corporate net operating losses are anticipated with no income to offset the loss. The S corporation accelerates net operating loss (at risk and passive loss limitations apply).
• When state and local tax laws favor S corporations
• If the corporation is subject to alternative minimum tax.

Qualifying for S Corporation status

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

• Must be a small business corporation
• Be a domestic corporation (United States)
• Issue only one class of stock
• Have a maximum of 100 shareholders
• Have only individuals, exempt organizations, estates and some type of trusts as shareholders
• Have no nonresident alien shareholder

Making the S Corporation election

To elect the S corporation status, you must have the consent of all shareholders. The consent must be in writing and be filed by the election deadline. The election is made on Form 2553.

The IRS has shown leniency for late filings. The applicant must have reasonable cause for not filing the election before the deadline.

Loss of the S Corporation election

An S corporation’s election can be revoked if any of the following happens:

• Majority shareholders revoke the election
• The business no longer qualifies as a small business corporation
• The corporation does not meet the passive investment income limitation

When the S corporation fails to qualify as a small business corporation, has more than 100 shareholders, has a second class of stock or non-qualifying shareholder, the S election is immediately terminated.

Reelection after termination

After an S election has been terminated, the corporation must wait five years before re-electing to become an S corporation.