Forming an S corporation

When forming an S corporation does not make sense

Subchapter S corporation tax status should be something you use only at particular times during the life of your corporation, rather than forming an S corporation permanently. If you want pass through tax treatment throughout the life of your business and you have not formed your corporation, don’t incorporate. Instead, you can form an LLC. You will get pass through taxation plus limited liability protection, just like forming an S corporation. In fact, the pass through benefits of an LLC are even better than S corporation.

Qualifications for S corporation rules

In forming an S corporation, the S corporation rules state that a corporation must meet certain requirements to qualify for S corporation status. To qualify for an S corporation status under subchapter S corporation rules, the corporation must have:

• 100 or fewer individual (not entity) shareholders who are U.S. citizens or residents and
• it must have only one class of stock. The shares may have different voting rights, but otherwise all corporate shares must have the same rights and restrictions.

Revoking S corporation and converting back to C corporation

You can revoke a subchapter S corporation election to go back to regular C corporation tax treatment, but then you cannot reelect S corporation status for another five years. After you make a subchapter S corporation election with the IRS, you can make the election with your state tax agency as well. Many states automatically recognize your federal S corporation election once it is filed.