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.

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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.

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S-Corporation Advantages

• 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%).

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