| Almost four million small businesses have elected to be | | | | taxpayer's estate after he or she passes away and a |
| treated as S corporations for tax accounting purposes. | | | | U.S. testamentary trusts (created by a will) can |
| And for simple reasons. An S corporation doesn't pay | | | | sometimes be S corp stockholders. So can a U.S. |
| corporate income taxes. And an S corporation often | | | | taxpayer's bankruptcy estate. Also, in some special |
| saves shareholder-employees thousands of dollars a | | | | circumstances, a charity can also own S corporation |
| year in Social Security and Medicare payroll taxes. | | | | stock and so can another S corporation. |
| That's the good news, so to speak. But there's bad | | | | And, just to make this point, while S corporations can |
| news, too, when you start talking about S corporations. | | | | own shares in partnerships or regular corporations, |
| You need to meet a number of qualifications in order | | | | partnerships and regular corporations can't own shares |
| to be treated as an S corporation, as outlined in the | | | | in an S corporation. |
| following paragraphs. | | | | S Corporations Can Have Only One Class of Stock |
| S Corporations Must Be Domestic U.S. Corporations | | | | Another qualification for becoming an S corporation is |
| The first qualification is that only U.S. domestic | | | | that the corporation can have only a single class of |
| corporations are eligible to become S corporations. A | | | | stock. The single-class-of-stock requirement can get |
| domestic corporation is one formed according to the | | | | tricky, but what it really means is that profits or |
| laws of one of the states (for example, California) and | | | | losses--both those that occur over the time the |
| not a foreign corporation formed in, say, Japan or | | | | corporation operates and those that occur when the |
| France. | | | | corporation liquidates--must be distributed based on the |
| S Corporations Can Have Only a Limited Number of | | | | ownership percentage. |
| Shareholders | | | | If a shareholder owns 10% of an S corporation, for |
| A second S corporation qualification relates to the | | | | example, he or she should get 10% of the operating |
| number of shareholders. In order to be treated as an S | | | | profit each year and 10% of any distributions of that |
| corporation, the business must have 100 or fewer | | | | profit. Similarly, when an S corporation dissolves, any |
| shareholders. | | | | profit and distributions paid at dissolution must be |
| You do have a bit of wriggle room in this "100 or | | | | calculated using shareholder percentages. |
| fewer" test, however. A family group typically counts | | | | Note that an S corporation can have nonvoting stock |
| as a single shareholder. A family includes a parent, his | | | | because not being able to vote doesn't affect a |
| or her children, grandchildren, great-grand children and | | | | shareholder's shares of profit, loss and distribution. Also, |
| so on through the great, great, great grandchildren. | | | | an S corporation can pay different employees |
| Also, a husband and wife who both own S corporation | | | | (including shareholder-employees) different salaries. |
| stock count as a single shareholder. | | | | S Corporations Can't Appear on the Prohibited S |
| S Corporation Shareholders Must Be U.S. Citizens or | | | | Corporation List |
| Permanent Residents | | | | One final qualification to being an S corporation needs |
| Another shareholder qualification exists for S | | | | to be mentioned. A handful of corporations are |
| corporations, too. In general, the owners, or | | | | prohibited, just as a matter of tax law, from electing to |
| shareholders, of an S corporation can be only | | | | be treated as S corporation. The list includes insurance |
| individuals who are U.S. citizens or permanent | | | | companies taxed under Subchapter L of the Internal |
| residents. In other words, you can't use the S | | | | Revenue Code, financial institutions using the "Sec. 585 |
| corporation option if one of your shareholders is | | | | reserve method" for dealing with bad debts, domestic |
| non-US taxpayer. | | | | internal sales corporations, and (finally) a corporation |
| Note, however, that a handful of special exceptions to | | | | that's taken the Puerto Rico and possessions tax |
| the rule about "individual U.S. taxpayers" exist. A U.S. | | | | credit for doing business in a U.S. possession. |