Subchapter S Corporation Tax Status
by Paolo Basauri
Published on this site: January 2nd, 2006 - See
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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.
P. Basauri is an expert author who writes for Subchapter
S Corporation
http://www.subchapter-s-corporation.org
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