CALIFORNIA S CORPORATION

A Sub Chapter S Corporation elects a special tax status with the Internal Revenue Service after the corporation has been formed.  S Corporations provides the same limited liability to shareholders, directors and employee as a C Corporation.  However, a S Corporation allows corporate profits to be passed through directly to owners, without being taxed at the corporate level. 

S Corporations are most appropriate for small business owners and entrepreneurs who prefer to be taxed as if they were still sole proprietors or partners.

After your general corporation is setup, a special IRS form must be filed. The reason for this is that instead of being taxed at the corporate level, the income "passes through" to the individual shareholders. Any income or loss generated by the S Corporaton is reported on the individual tax returns of the shareholders.

For many small businesses, the forming of a S Corporation offers the best of both worlds, by combining the tax advantages of a sole proprietorship or partnership, with limited liability and enduring life of a corporate structure.

To elect a S Corporation status, your corporation must meet specific guidelines.

• All stockholders of the S Corporation must be citizens or permanent residents of the United States.
• The maximum number of stockholders for an S Corporation is 75.
• If a S Corporation is held by an "electing small business trust," then all beneficiaries of the trust must be individuals, estates or charitable organizations. Interests in the trust cannot be purchased.
• S Corporations may only issue one class of stock.
• No more than 25 percent of the gross corporate income may be derived from passive income of a Sub Chapter S Corporation. Not all domestic general business corporations are eligible for S Corporation Status.

Major Benefits

Major Drawbacks

S Corporation - FAQ's