Overview of the Subchapter S Corporation Designation
Although the term Subchapter S Corporation sounds as if it
applies to a certain type of company, in actuality, it is merely
a term used by the IRS (Internal Revenue Service) to designate a
particular tax status. Almost any company that is comprised of
75 or less shareholders can apply for the Subchapter S
Corporation tax status designation. Being approved for a
Subchapter S Corporation status allows the company to be taxed
as if it were a partnership or sole proprietorship. An
application is generally submitted just after a company has
incorporated. At any time a company may choose to withdraw from
Subchapter S Corporation tax status by filing another form with
the IRS. Withdrawals must be submitted prior to the beginning of
a new tax year.
Subchapter S Corporation Eligibility Requirements
In order for a business to qualify as an S Corporation, there
are several eligibility requirements that need to be met. Any
corporation that meets the following criteria can be approved
for Subchapter S Corporation status:
* The company must have 75 or fewer shareholders, and each
shareholder must agree to file as an S Corporation. * Every
stockholder must be a resident and citizen of the United States
* Stock sold by the company must be of a single class * The
company is required to use the calendar year as the official
fiscal year
If a corporation meets these requirements, they must file form
2553 with the IRS to be granted Subchapter S Corporation tax
status.
Advantages to Subchapter S Corporation Status
This tax status is appealing to many business owners for several
reasons. The primary advantage to filing as an S Corporation is
that income is passed through directly to the shareholders who
file corporate income with their personal taxes. In this manner,
the corporation avoids being taxed twice for the same income. In
most cases, S Corporations do not pay any income tax and losses
are absorbed by the shareholders instead of the corporation.
Additional advantages to Subchapter S Corporation tax status
includes:
* Return on investment earnings do not fall under
self-employment tax status providing the shareholder/employee
receives reasonable compensation for their work.
* Financial documentation and accounting is less complicated
than that required by traditional corporations.
* S Corporation status may provide easier access to credit
resources, depending on the business history of the corporation.
Disadvantages to Subchapter S Corporation Status
When considering whether or not to file for Subchapter S
Corporation tax status, companies should also be aware of
potential disadvantages. Because the financial power is in the
hands of the shareholders, executive decisions need to be agreed
upon by all. Disagreements between individual shareholders can
lead to a stall in the process. Additionally,
stockholder/employees must declare health insurance and other
employee benefits as taxable income if they own more than a 2%
share of stock. Subchapter S Corporation tax status is most
beneficial to corporations with small numbers of shareholders
that have a common vision for the future of the company.
About the author:
P. Basauri is an expert author who writes for
Subchapter S
Corporation
