S Corporation Taxes

An S corporation is a creature of the federal tax laws. For all other purposes, it's treated as a regular corporation. So, to form an S corporation you first have to incorporate under state law.

Then, you must file a special IRS form electing to be taxed similarly to a partnership. This election preserves the corporation's limited liability under state law but avoids taxation at the corporate level. This means that income and losses of the S corporation are passed through to shareholders in much the same manner as a partnership passes through such items to partners.

One important difference between partnerships and S corporations is that in the S corporation all profits, losses, and other items that pass through must be allocated according to each shareholder's proportionate shares of stock; so, if you own 50 percent of the stock, you must receive 50 percent of the losses, profits, credits, etc. This is not the case with a partnership or an LLC, where one partner or member can receive different percentages (or changing percentages over time) of different tax items if the operating agreement so specifies.

S corporation requirements. Although the tax laws don't limit S corporation status to small corporations in terms of revenue, the requirements for electing can make it difficult to operate a large business as an S corporation. To obtain S corporation status under the federal income tax law, all of the following requirements must be met: