S Corporation
S Corporation
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An S Corporation is a pass through entity for tax purposes, like a partnership
whose income or losses "pass through" to its shareholders' personal tax
returns in proportion to each shareholder's percentage ownership of the S
Corporation (their distributive share). Those shareholders then pay personal
income taxes based on the S Corporation's income, even if none of the
income was actually distributed to the shareholders. The S Corporation is not
subject to corporate level income tax.
If a start-up corporation files IRS Form 2553 within 75 days after incorporation, the IRS will treat as an S Corporation from its date of incorporation.
To convert from a C Corporation to an S Corporation, you must meet the same requirements as a newly formed corporation electing S Corporation status. You must meet the requirements of a "small business corporation" which are, in general:
● Be a domestic corporation organized under the laws of any state or U.S. territory;
● Have only individuals, estates or certain trusts as shareholders (no partnerships or corporations as shareholders);
● Have only citizens or residents of the United States as shareholders;
● Have only one class of stock (differences in voting rights are OK);
● Have no more than 75 shareholders.
To become an S Corporation you must make an election to be an S Corporation on IRS Form 2553 (and the corresponding form for your state of incorporation) before the 16th day of the third month following the close of the C Corporation tax year if the election is to be effective for the current tax year. The C Corporation must qualify as an eligible corporation during those 2 1/2 months and all shareholders during those 2 1/2 months must consent, even if they do not own stock at the time of the election. If the election is filed after the 15th day of the third month of the tax year, the election will be in effect for the next tax year and all shareholders at the time of the election must consent.
Voluntary termination of an S election is made by filing a statement with the Service Center where the original election was properly filed. A revocation may be made only with the consent of shareholders who, at the time the revocation is made, hold more than one-half of the number of issued and outstanding shares of stock (including nonvoting stock) of the corporation. There is specific information that must be included in the statement and this information is outlined in Regulations section 1.1362-6(a)(3) and in Instructions for IRS Form 1120S, U.S. Income Tax Return for an S Corporation.
The revocation may state an effective date as long as it is on or after the date the revocation is filed. If no date is specified and the revocation is filed before the 15th day of the third month of the tax year, the revocation will be effective for the current tax year. If the revocation is filed after the 15th day of the third month of the tax year, the revocation will be effective for the next tax year.
You may want to consult the IRS Customer Service phone line at 800-829-1040 or you may wish to consult with a tax professional to be certain you have all the necessary information to file a proper revocation.
Under certain conditions the S Corporation election may terminate automatically.
Disclaimer: The foregoing is intended to provide general information and may not be suitable in specific instances. The glossary information is not intended to be exhaustive, but rather to illustrate typical considerations. The material is provided with the understanding that it is not legal, accounting, tax or any other professional advice.
Copyright © 2003-2010 LawVantage.com, LLC. All rights reserved.
Important LawVantage.com, LLC and its website, CorporateBoardMinutes.com, do not render any legal, accounting or other consulting advice.
For legal advice, you should always consult with a qualified attorney-at-law.
Website development by
Vine Design.
If a start-up corporation files IRS Form 2553 within 75 days after incorporation, the IRS will treat as an S Corporation from its date of incorporation.
To convert from a C Corporation to an S Corporation, you must meet the same requirements as a newly formed corporation electing S Corporation status. You must meet the requirements of a "small business corporation" which are, in general:
● Be a domestic corporation organized under the laws of any state or U.S. territory;
● Have only individuals, estates or certain trusts as shareholders (no partnerships or corporations as shareholders);
● Have only citizens or residents of the United States as shareholders;
● Have only one class of stock (differences in voting rights are OK);
● Have no more than 75 shareholders.
To become an S Corporation you must make an election to be an S Corporation on IRS Form 2553 (and the corresponding form for your state of incorporation) before the 16th day of the third month following the close of the C Corporation tax year if the election is to be effective for the current tax year. The C Corporation must qualify as an eligible corporation during those 2 1/2 months and all shareholders during those 2 1/2 months must consent, even if they do not own stock at the time of the election. If the election is filed after the 15th day of the third month of the tax year, the election will be in effect for the next tax year and all shareholders at the time of the election must consent.
Voluntary termination of an S election is made by filing a statement with the Service Center where the original election was properly filed. A revocation may be made only with the consent of shareholders who, at the time the revocation is made, hold more than one-half of the number of issued and outstanding shares of stock (including nonvoting stock) of the corporation. There is specific information that must be included in the statement and this information is outlined in Regulations section 1.1362-6(a)(3) and in Instructions for IRS Form 1120S, U.S. Income Tax Return for an S Corporation.
The revocation may state an effective date as long as it is on or after the date the revocation is filed. If no date is specified and the revocation is filed before the 15th day of the third month of the tax year, the revocation will be effective for the current tax year. If the revocation is filed after the 15th day of the third month of the tax year, the revocation will be effective for the next tax year.
You may want to consult the IRS Customer Service phone line at 800-829-1040 or you may wish to consult with a tax professional to be certain you have all the necessary information to file a proper revocation.
Under certain conditions the S Corporation election may terminate automatically.
Disclaimer: The foregoing is intended to provide general information and may not be suitable in specific instances. The glossary information is not intended to be exhaustive, but rather to illustrate typical considerations. The material is provided with the understanding that it is not legal, accounting, tax or any other professional advice.
Copyright © 2003-2010 LawVantage.com, LLC. All rights reserved.
Important LawVantage.com, LLC and its website, CorporateBoardMinutes.com, do not render any legal, accounting or other consulting advice.
For legal advice, you should always consult with a qualified attorney-at-law.
Website development by
Vine Design.