Before any business entity can become an “S” corporation, it must first be established as a traditional (or “C”) corporation. Once a decision has been made to seek the “S” status, a special Form 2553 must be signed by all of the shareholders, indicating their support for this change. However, other requirements must also be met before the IRS will grant “S” corporation status. The “S” term simply refers to “Subchapter S of the Internal Revenue Code which provides corporations a ‘tax election’ option—a choice on how they want to be taxed.”
These additional requirements are set forth below, followed by further information about some of the benefits that become available once this new tax status has been acquired.
Additional Requirements for Corporations Seeking “S” Status
Your business entity must be a domestic corporation;
It must have a total number of shareholders equal to or below 100;
The corporation can offer only one type of stock;
Your corporation cannot be a forbidden type of financial institution, insurance company or domestic international sales corporation;
All shareholders must meet certain qualifications. They usually include specific types of individuals, as well as some trusts and estates.
General Benefits Available to “S” Corporations
It’s much easier to avoid double taxation once the business entity becomes classified as an “S” corporation -- as compared to a traditional one. “income stream
can choose to “pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes;”
The IRS has held that an “S” corporation is a legal entity separate and apart from those who own it.” However, while this limitation of liability is desirable, it’s not absolute. Therefore, if any employee files a tort action based upon a workplace incident, all parties may not be fully shielded from litigation.
Always remember that “S” corporations must also be registered with the state, and obtain all applicable business licenses and permits. In addition, “any shareholder who works for the company must pay him or herself ‘reasonable compensation.’” If the IRS decides that the shareholder employee is not being paid “fair market value, [it might] reclassify any additional corporate earnings as ‘wages.’”
To obtain help with handling all of your Georgia business planning needs, please contact Shane Smith Law today. You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: (770) 487-8999.