An S Corporation is a special form of corporation (Note: The “S” in S Corporation refers to subchapter S of the tax code). S Corporations are based on C Corporations but they are not treated as a separate tax entity as C Corporations are. Instead, the income of an S Corporation is “passed through” to the personal income of its owners (shareholders) in proportion to their ownership interest. An S Corporation is created by forming a traditional C Corporation and then filing the IRS Form 2553 (The Subchapter S Election) for federal recognition of S Corporation tax status. While the S Corporation has many of the same features as a C Corporation, there are some important differences.
Note: While the S Corporation features similar pass through taxation to an LLC, in the area of self-employment taxes an S Corporation can have an advantage over an LLC. The compensation (salary and bonuses) of S Corporation shareholders is subject to self-employment tax, but not on the profits automatically allocated to them as a shareholder. This can be an advanced and aggressive tax strategy, so be sure to consult with the appropriate tax and legal specialists before pursuing it.
• Limited Personal Liability
This limits the liability of the owners/investors to only the amount of their investment. The owners of a corporation are not personally liable for business debts, claims, or other liabilities.
• Perpetual Existence
The existence of a corporation is considered perpetual, although it can be terminated voluntarily by its owners (shareholders).
• Better fringe benefits
While all business entities can provide fringe benefits to its owners and/or employees, the C Corporation allows for a greater range of benefits.
• Pass-Through Taxation
The S Corporation does not have a separate tax status from its owners (shareholders). Instead, the income is allocated to the personal income proportional to his or her ownership interest.
• More extensive recordkeeping requirements
Corporations typically require more ongoing paperwork than most other business entities in order to stay compliant with the law and maintain their corporate status. This includes holding and documenting annual meetings of shareholders and directors and keeping minutes of important corporate meetings.
• Additional Restrictions
S Corporations cannot have more than 75 individual (not entity) shareholders
S Corporations must have shareholders who are US Citizens or US Residents
S Corporations may only have one class of stock
A Corporation is managed and run by its directors and officers. The directors are appointed by the shareholders and are responsible for the overall management and corporate governance of the corporation. The directors appoint the officers who are responsible for the day to management and operations of the corporation. The typical officer positions are president, vice-president, treasurer, and secretary, although there can be more and sometimes different titles are used. In most states only one director and one officer is required, and they can usually be the same person.
For purposes of federal taxation, an S Corporation is taxed differently than a C Corporation. Typically, the S Corporation files its annual return using the Form 1120S, as opposed to the 1120 for a C Corporation. The 1120S is an informational return; it simply informs the federal tax authorities the amount of net profit/loss made by the S Corporation, the shareholders amongst which the profit/loss will be distributed, and the proportion in which the profit/loss is distributed to the shareholders. There is no tax payment/refund associated with the 1120S tax return, as the S Corporation does not have the independent tax status that a C Corporation has. Instead, the profits/losses of the S Corporation are considered distributed to the shareholders in proportion to the ownership interest of the shareholder.
Once you receive the filed Articles of Incorporation, which signifies the formation of the corporation by your state, your corporation will need to hold an organizational meeting of the initial shareholders and directors. At this meeting the directors will typically adopt corporate bylaws, distribute corporation stock to initial shareholders, and appoint corporate officers. Also, in most states, directors must meet at least once a year, as directors typically must be elected (or reelected) each year. At the annual meeting the board members accept their election to the board, and transact any other necessary business. The date, time, and location of the annual meeting is typically specified in the bylaws. Written notification of the annual meetings is not usually required, but it is probably a good idea. Other regular meetings may be held as spelled out in the bylaws. Special meetings may be called, and it is typically required that directors receive written notice of the date, place, and purpose all special meetings of directors.
NOTE: It is important to observe these formalities and take corporate minutes of the required meetings. Failure to follow these formalities and properly document your meetings (i.e. keeping minutes) can place your corporate status in jeopardy. The necessary record keeping material, sample bylaws, and stock certificates are included in the Customized Corporate Kit provided by surefilings.
The number of initial shares your corporation is authorized to distribute is specified in the Articles of Incorporation. The actual number is more or less arbitrary, at your discretion. surefilings uses a default number of 1500 shares (this is due to the fact that 1500 is easily divisible by 2, 3, 4, 5, 6), with a par value of one cent (if your state requires par value, otherwise no par value will be assigned). Some states charge more to form a corporation with a high number of shares and/or high par value.
The bylaws of a corporation are an internal document that contains rules for holding corporate meetings and carrying out other formalities according to state corporate laws. Bylaws are not filed with the state.
Par value is a nominal dollar amount given to corporate shares. It doesn’t necessarily reflect their real value, and is typically set at a low value (i.e. one dollar or one cent). The par value of a share is the minimum price at which it may be sold to shareholders, and the par value must be the same for all shares of the same class. The shares can be sold to the initial shareholders, at par value or more, but the price must be the same for each share. Not all states require a par value. Unless you specify otherwise, surefilings will authorize 1500 shares (this is due to the fact that 1500 is easily divisible by 2, 3, 4, 5, 6) with a par value of one cent, or at no par value if not required by your state.
An S-Corporation consists of all three: officers, directors and shareholders.
Shareholders are the owners of the corporation and elect the directors.
Directors guide and are involved in the fundamental decisions of the corporation on behalf of the shareholders.
Officers are selected by the directors and run the day-to-day operations of the corporation.
These do not need to be separate people. Any person can fill all three positions. In small businesses, one person can be the only shareholder, the only director, and the only officer.
The 2553 Form, known as the Subchapter S election, is required to be filed with the IRS to get S-Corporation status for purposes of federal taxation. Filing this Form with the IRS is used to convert a C-Corporation into an S-Corporation.
In order to qualify as an S-Corporation for the 2006 tax year, the corporation must file the IRS Form 2553 by March 15, 2006. If the corporation is filed on or after January 1, 2006 then the S-Corporation election can be submitted anytime within the tax year as long as the filing is accepted no later than 75 days after the corporation has started any of the following activities listed below (whichever is earliest):
• Issued stock to shareholders
• Acquired assets
• Conducted business as a corporation
Typically entrepreneurs will select the S-Corporation as the entity of choice for the following reasons:
• The S-Corporation combines the advantages of the sole proprietorship, the partnership, the
LLC and the corporation into one entity.
• Unlike sole proprietors and the partners in a partnership the shareholders of the S-Corporation are granted the same level of limited liability and personal asset protection as are the shareholders of a corporation.
• The S-Corporation allows share holders to avoid the "double taxation" that is levied on shareholders of C-Corporations that is because all of the income or losses in a S-Corporation are reported only once on the personal income tax returns of the S-Corporation's shareholders.
There are no citizenship or residence requirements for ownership of a C corporation or an LLC. The S corporation however does not allow nonresident aliens to be shareholders (owner), but any US citizen or resident alien may be a shareholder (owner). You would, of course, require an in state street address for the state to forward official legal and tax correspondence including service of process, known as the registered agent address, but neither residency nor citizenship is required for ownership of a C corporation or an LLC.
If you already have an EIN, and the organization or ownership of your business changes, you may need to apply for a new number. Some of the circumstances under which a new number is required are as follows:
• An existing business is purchased or inherited by an individual who will operate it as a
• A sole proprietorship changes to an LLC, corporation, or partnership,
• A partnership changes to an LLC, corporation, or sole proprietorship,
• A corporation changes to an LLC, partnership, or sole proprietorship,
• An LLC changes to a corporation, partnership, or sole proprietorship,
• An individual owner dies, and the estate takes over the business.
Although we perform a name search for your company before we file it with the state, the company name is not official until it has been accepted and filed by the state. We cannot recommend making any business or financial decisions based upon the company name until it has officially been accepted and filed by the state.
If your first name choice does not appear to be available, we will automatically proceed to the second name choice. If neither is available, we will contact you to for further instructions. The alternate name is not a required field; if you are not certain that the alternate name will be acceptable to you then please leave that field blank.
Due to the fact that the EIN is filed with the IRS in the name of the company, we have to wait until the state officially forms your company and we receive the official filed documents from the state in order to electronically obtain your EIN. Once we have received your documents from the state we will immediately obtain your EIN electronically and forward everything to you, ASAP.