A subchapter S corporation allows small-business owners to reap the rewards of having an incorporated business without the tax disadvantages associated with a regular corporation. S corporations are required to adhere to Internal Revenue Service regulations in terms of size and ownership. Shareholders of an S corporation receive limited liability protection from company debts and obligations; however, the number and type of shareholders is restricted.
A subchapter S corporation cannot have more than 100 shareholders participating as owners of the business. Individuals who own shares of an S corporation must have U.S. citizenship or status as a resident alien. Foreign individuals and foreign businesses cannot own shares of a subchapter S corporation. A limited liability company, corporation and partnership cannot own shares of a subchapter S corporation. However, certain trusts and estates may own shares of an S corporation.
Businesses that earn 95 percent of their revenue as a result of exporting goods cannot organize as an S corporation, according to the Reference for Business website. Insurance companies, banks and savings and loans institutions cannot form an S corporation. A regular corporation that has been organized as an S corporation within the last fived years cannot gain status as an S corporation. Corporate subsidiaries may not claim status as an S corporation. All S corporations must be located on U.S. soil. This means an S corporation cannot have locations in other countries.
An S corporation can only issue one class of stock to shareholders of the business. This means that shareholders of the business receive the same price per share when the company distributes dividends. Also, shareholders receive their dividends at the same time in the event of the company's dissolution. Shareholders of the business may have different voting rights, but that does not serve as an indicator of different stock classes, as explained by the Reference for Business website.
A major advantage of an S corporation concerns the avoidance of double taxation that occurs in a regular corporation. A regular corporation must pay taxes on business profits at the company's corporate tax rate. The second tax occurs because shareholders of a regular corporation must pay taxes on dividends received from the business. In an S corporation, shareholders of the business pass their portion of profits and losses directly to their personal income tax return. This means a shareholder pays taxes on company profits according to their personal income tax rate.
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