What is a S-Corp election?

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S-Corporation

The Corporation or Limited Liability Company can elect with the IRS to be treated as a S-Corp.

Per Irs.gov, the S-Corp are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.

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

  • Be a domestic corporation

  • Have only allowable shareholders

    • May be individuals, certain trusts, and estates and

    • May not be partnerships, corporations or non-resident alien shareholders

  • Have no more than 100 shareholders

  • Have only one class of stock

  • Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

In order to become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation (PDF) signed by all the shareholders. See the Instructions for Form 2553(PDF) for all required information and to determine where to file the form.

Reasonable Compensation

S-corporation must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.

The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation."

 

source: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

SabOOz business recommend consulting with your legal or tax adviser before selecting the S-Corp election.

3 Easy Steps

To File Your Entity

Step 1

Complete Questionnaire Online

Step 2

We prepare, create and file your formation documents

Step 3

Receive your completed incorporation package at your front door

Choose (Yes) for S-Corp Election When Completing Questionnaire 

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