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.

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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).

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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.

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.

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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."

 

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