S-Corporation FAQs Back to All FAQs

What are the qualifications to be a S Corporation?

To qualify as an S Corporation (S Corp) in the United States, a business must meet specific eligibility criteria set by the Internal Revenue Service (IRS). The primary purpose of electing S Corporation status is to avoid the double taxation associated with C Corporations. Here are the qualifications and requirements for S Corporation status:

1. Domestic Corporation: The business must be a domestic corporation, meaning it is incorporated under the laws of the United States and operates within the country.

2. Allowable Shareholders: An S Corporation is limited to having certain types of shareholders. Eligible shareholders include individuals, estates, certain trusts, and tax-exempt organizations. Partnerships, corporations, and non-resident aliens are generally not allowed to be shareholders.

3. Number of Shareholders: S Corporations can have no more than 100 shareholders. This limitation is intended to maintain the characteristics of closely held businesses.

4. One Class of Stock: S Corporations are allowed to have only one class of stock. While all shares must have the same rights to distribution and liquidation proceeds, differences in voting rights are permitted.

5. Tax Year: An S Corporation must adopt a calendar year or get approval from the IRS to use a fiscal year. Most S Corporations use the calendar year.

6. Election by Shareholders: To become an S Corporation, the business must submit Form 2553, Election by a Small Business Corporation, to the IRS. This form must be signed by all eligible shareholders, and it must be filed within a specific timeframe.

7. Timely Election: The S Corporation election must be made within a certain period. For a new corporation, the election must be made no later than two months and 15 days after the beginning of the tax year the election is to take effect. For existing corporations, the election is generally effective for the next tax year if made by the 15th day of the third month of the tax year.

8. Consent of All Shareholders: All shareholders must consent to the S Corporation election. This includes both current and future shareholders.

9. Active Business Operations: The business must be engaged in active business operations. Certain types of businesses, such as investment companies, are generally not eligible for S Corporation status.

10. Individual Tax Returns: The S Corporation itself does not pay federal income tax. Instead, its income, deductions, and credits are passed through to the individual shareholders, who report them on their personal tax returns.

It's important for businesses considering S Corporation status to carefully review the eligibility criteria, consult with legal and tax professionals, and ensure compliance with all IRS regulations. The specific rules and requirements may change, so it's advisable to stay informed about any updates from the IRS or seek professional guidance when making important tax-related decisions.

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