| Like a C corporation, the S corporation is established | | | | have already been taxed to the stockholders, |
| under state corporation laws. The major difference is | | | | dividends paid by S corporations normally are not |
| that an S meets certain qualifications under | | | | taxable to the stockholders. |
| Subchapter S of the Internal Revenue Code not to be | | | | There are limits on the ownership structure of S |
| taxed as a corporation for federal income tax | | | | corporations. First, only a small business corporation |
| purposes. The tax laws regarding S corporations are | | | | can elect S status. To qualify, the business must be a |
| complex and the legal and accounting costs of starting | | | | domestic corporation, have no more than 75 |
| and maintaining S status could override some of the | | | | shareholders, and have only certain classes of eligible |
| tax advantages. In addition, state laws vary as to the | | | | shareholders. For instance, C corporations, partnerships, |
| taxability of an S corporation's income. Like C | | | | LLCs, and trusts are not eligible shareholders of an S |
| corporations, S corp. stockholders normally have limited | | | | corp. All stockholders initially must consent to an S |
| liability for corporate obligations. S corporations are | | | | corporation election. However, once made, an S |
| taxed, in most respects, like a partnership, rather than a | | | | election can be revoked by shareholders with more |
| corporation. There are usually no federal income taxes | | | | than 50 of the stock. Once an election is revoked or |
| at the corporate level for S corporations. Profits or | | | | terminated, an election cannot be made again for five |
| losses from S corporations flow directly through the | | | | years. |
| company to the shareholders, thereby avoiding double | | | | S corporations can have only one class of stock |
| taxation. Investors are also able to use losses from S | | | | unless the only difference among the shares of |
| corporations as direct tax deductions against other | | | | multiple classes of common stock is in their voting |
| income, with limitations for those shareholders | | | | rights. This means that an S can have both voting and |
| considered to be passive investors. Stockholders of S | | | | nonvoting common stock. S corporations must |
| corporations are taxed on the net profits and gains of | | | | continue to meet the foregoing conditions. Otherwise, |
| the corporation even if they do not receive any | | | | the S election is terminated and the corporation is |
| dividends from the corporation. In fact, since profits | | | | taxed as a C corporation henceforward. |