S corporations (S corps) blend limited liability of corporations with pass-through tax status of partnerships. There are approximately 4.2 million S corps in the US. Learn the best practices for managing these legal entities.
S corps are usually compared with C corps. S corporations provide favorable tax treatment, but impose ownership limitations which C corps avoid.
S corporations are pass-through entities for taxation of most business income. That means that S corps avoid double taxation of business income and dividend income for the owners.
The ownership structure of an S corp is much more restrictive than a C corporation.
To qualify as an S corporation under the federal tax code, an S corp must:
While the S corp has a numerical advantage on LLCs, LLCs are growing faster as a preferred type of entity for small businesses.3
4.2 million S corps filed tax returns in 2012, compared to 2.2 million LLCs. However, the rate of growth in LLCs is higher.
LLCs have 3 advantages over S Corps:
After you form a S corporation, you must maintain it to keep it in compliance. Track the following information for a corporation:
This table summarizes the types of C corporation documents and filings:
|Ownership agreement||at formation||No|
After forming a S corporation, it is important to track compliance obligations. Compliance requirements vary widely based on jurisdiction and line of business.
Here is how to design compliance tracking:
|Trade name or DBA||State||Yes||Yes||Annual|
Of course, you should substitute actual filing requirements for your business. This table gives you a framework to capture the essentials of any compliance filing.
S corporations sometimes have a Board of Directors corporate structure to separate ownership governance (a board of directors) from management (officers).
Most states require that corporations have a Board of Directors unless the shareholder agreement provides otherwise.9
People often serve more than one role so it is important to list officers and directors by role and not by name. In the long run, it is also helpful to track terms of service for each role and person.
Here is the information to track for officers and directors:
Many boards use a committee structure to parcel out work among board members. The list of roles should also include committee assignments.
Please note that a person can have two different roles with very different terms of service.
Corporate owners and investors are usually called "Shareholders" or "Stockholders". Since S corps can only have natural persons as owners with only one class of stock, keeping track of ownership is straightforward.
You should capture the name of the owner and the percentage of ownership at a minimum.
To preserve the benefits of your legal entity, effective ongoing maintenance is critical.
Exceptions apply. ↩︎
Exceptions apply. ↩︎
Specify the government agency. ↩︎
Substitute the actual expiration date ↩︎.
Add the periodic cycle. There are exceptions. ↩︎