Most owners are aware of sole ownerships, partnerships, and corporations as a form of a business. Each have their pros and cons. What if you could utilize some of the advantages of corporations AND the advantages of partnerships? Take a look at S Corporations! They are an increasingly popular business structure that utilizes the taxation treatment of partnerships meshed with the legal protections of a corporation.
Qualifying for S Corporation Status
In order to qualify to elect S Corporation status, the IRS has set strict rules. For a corporation to be able to elect the status:
- Must be a domestic corporation.
- Must have no more than 100 shareholders.
- Shareholders can only be individuals, estates, and certain exempt organizations.
- No nonresident alien shareholders.
- Corporation only has one class of stock (no preferred stock).
- Cannot be certain types of ineligible corporations (such as a bank using the reserve method of accounting for bad debts).
- Must have or will adopt a standardized tax year (calendar, a 52-53 week tax year, etc.).
- AND ALL shareholders must consent to the S corporation election.
Electing S Corporation Status
Corporations looking to elect S corporation status must complete and file Form 2553 no later than 2 months and 15 days after the beginning of the tax year the election is to take effect. Otherwise, they can file any time during the tax year preceding the tax year it is to take effect.
S Corporation Taxation
Just like a partnership, taxation rules treat S Corporations as “pass through” entities. This means that the taxes of the S corporation pass through the company and onto the shareholders of the S corporation, thus avoiding the “double taxation” that corporations get with the taxes applied to the corporation itself and its shareholders. S Corporations use Form 1120S for their annual tax filing. It bears some similarities to Form 1065 for partnerships with its use of Schedule K-1 forms.
Growing corporations are seeing the value of S Corporation status, however some may need backup in keeping their books straight to meet the many rules behind maintaining that status. Consider talking to us here at MiklosCPA! We have helped many small and mid-sized businesses with their accounting and taxation needs. Freeing up the accounting allows a business to focus and charge ahead with their growing goals and ambitions. Follow our social media pages for more quick tax tip articles like this in the future.