The Shareholders of a corporation may elect to be taxed under Subchapter S of the Internal Revenue. If the Corporation makes this election, it will be referred to as an “S corporation.” An S corporation is the same as any other corporation in that it maintains the same rights, duties, and obligations of a corporation and has all the general characteristics of a corporation. However, an S corporation is considered a pass-through entity, like partnerships. Most of the tax items of an S corporation, such as income, losses, deductions, and credits, are passed through to the shareholders. The shareholders report these items on their individual income-tax returns, and the S corporation escapes the double taxation on dividend distributions of a “C corporation”. Although California recognizes S corporations and generally follows the federal tax treatment, a corporate level tax is imposed on S corporations in California, albeit at a lower rate than that imposed on C corporations.
There are requirements that the Corporation must meet to make the election to be treated as an S corporation, including:
- It must be a domestic corporation.
- It must have no more than 100 shareholders; husbands and wives (and their estates) are one shareholder regardless to how title is held, and all members of a single family may be treated as one shareholder if the required election is made.
- All shareholders of the corporation must be individuals, decedents’ estates, estates of individuals in bankruptcy, certain types of trusts, or specifically certain defined organizations.
- All shareholders must be U.S. citizens or resident aliens.
- The corporation may have only one class of stock; designation of otherwise identical stock as voting and nonvoting will not be deemed to create a second class of stock
Election of S corporation status requires the filing of I.R.S. Form 2553. Other documents may be required, such as the Qualified Subchapter S Trust Election by a beneficiary of a trust that is to be a shareholder of an S corporation.