S Corporation Overview

Today TaxMama® hears from someone in the TaxQuips Forum, who keeps asking similar questions about California LLCs and Canadian Limiteds owning an S Corp.  So, let me tell you a little bit about S Corporation rules.

 Dear Family,

An S corporation is not for everyone. First of all you must meet the basic criteria:

To qualify for S corporation status, the corporation must meet the following requirements:

  • Be a domestic corporation
  • Have only allowable shareholders
    • including individuals, certain trust, and estates and
  • Have no more than 100 shareholders
  • Have one class of stock (which means that all owners share profits proportionately)
  • Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.
  • may  not include partnerships, corporations or non-resident alien shareholders (in other words – no Canadian or  foreign shareholders, no S corporation shareholders.)

In order to become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation (PDF) signed by all the shareholders by the 15th day of the 3rd month after formation.

In addition, shareholders who own more than 2% of the business are not entitled to regular employee benefits. Having the company pay for your health care requires excessive paperwork.

The working officers/owners/shareholders of the corporation cannot simply draw out money whenever they feel like it. They must be on payroll, getting paid a reasonable salary. (Note: Reasonable is undefined, but the IRS knows when it’s not reasonable – got it?)

Now that the IRS is cracking down on S corps that underpay their officers, there aren’t many good reasons to form them any longer.

For more information, visit the IRS page about S corps.

And remember, you can find answers to all kinds of questions about S corporations, and other tax and business issues, free. Where? Where else? At www.TaxMama.com.


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