Who Can Form an S-Corporation?
S-Corporations are more suitable for small and family businesses, and for those who start their business with a small investment.
In order to form or convert to an S-Corporation some conditions must be met:
- S-Corporation cannot have more than 100 shareholders.
- All shareholders must be either U.S. citizens or residents, estates, or certain trusts.
- Can only have one class of stock. Preferred stock is not allowed.
- Profits and losses must be accorded to owners in proportion with their ownership stake.
- Must use the calendar year as its fiscal year unless it can demonstrate to the IRS that another fiscal year satisfies a business purpose.
- Shareholders cannot deduct losses in excess of their investment.
- The corporation cannot deduct fringe benefits given to employees who own more than 2% of the corporation.
- Forming S-Corporation generally allows you to pass business losses through to your personal income tax return, where you can use it to offset any income that you have from other sources.
- S-Corporation shareholders are not subject to self-employment taxes (Roughly 15.3%).