An S-Corporations is basically a C-Corporations that has elected a special tax treatment with the IRS in order to eliminate the double taxation effect faced by C-Corporations. Just like C-corporations, S-corporations are separate business entities, they are not an extension of their owners and S-corporations are created by the state at the request of one or more people.

Just like a C-corporations an S-corporation is owned by its shareholders, however, the ownership of S-corporations is more restrictive than C-corporations as stockholders must be individuals or certain types of trusts. An S-corporation cannot have more than 75 owners and this may present some problems to future growth, however a husband and wife count as one stockholder. Employees can own part of the business by issuing them with shares in the business (stock option).

The following are some of the restrictions associated with S-corporations:

• Must have less than 75 owners.
• Shareholders must be individuals or certain types of trusts.
• Non-resident aliens cannot be shareholders.
• Matching Slipcase.
• S-Corporations cannot hold more 80% or more of another corporation.
• There can be only one class of stock, meaning that all shares of the stock have the same rights when it comes to corporate profits and corporate assets, however shares are allowed to differ with respect to voting rights.
• A corporation must make a timely filing of Form 2553 to the IRS in order to qualify as a S-corporation status. This election must be made by March 15 if the corporation is a calendar year taxpayer in order for the election to take effect for the current tax year.

Generally speaking the owners or shareholders of a corporation are not liable for the corporation’s debt because a corporation is a separate business entity not linked to owners or shareholders. However, sometimes especially in small corporations, the bank will ask the owner or the major shareholder to guarantee any loans, in which case an owner or major shareholder is personally liable to pay the loan if the corporation does not have enough cash.

The amount of money invested in a corporation translates into how many shares you have in a corporation. You can invest as much as you want to if you can find somebody else to sell you the shares.

Normally in large corporations the shareholders do not run the business, instead they elect the board of directors. The board of directors is then responsible for appointing managers (corporate officers) to run the business, the managers include: the president, vice-president, secretary and treasurer. In small corporation’s sometimes the shareholders or the owners run the business without the formal board of directors. The number of directors on the board varies depending on the business and its size, however most states require at least one director. When trying to decided on the number of directors, remember too many directors will make it more difficult to reach decisions. For a small business it is a good idea to keep the number of directors to a small group. Often, directors are the shareholders and officers.

Eliminating double taxation is the major advantage associated with S-corporation’s, the tax situation is similar to that of a partnership, i.e. the income of the corporation is distributed to the shareholders according to the number of shares they own, then each shareholder reports his share of the income on his or her own tax return. The money distributed to shareholders is not called a dividend, instead it is called distributions. The S-corporation election must be filed each year by the 15th day of the third month of the tax year for the corporation to be treated as an S-corporation.

The deductible losses of an S-corporation shareholder are limited to shareholder’s basis in the stock plus any loans the shareholder made to the corporation. To illustrate this look at the following example:

Two investors A and B each invest $ 100,000 and form an S-corporation. Now the S-corporation borrows an additional $ 200,000. If for some reason the S-corporation fails, then the deductible loss for inventors A and B is $ 100,000 each and not 200,000 each. In an S-corporation this situation will occur even if the investors A and B guaranteed the loan. This is an important consideration for investors specially if the business is going to be financed by a loan.

The situation is similar to a partnership, you can offer your employees and stockholders tax-deductible benefits such as:

• Retirement plans.
• Savings plan.
• Medical coverage.

• A corporation is a separate business entity and typically owners are liable for business debts.
• Ease of ownership transfer.
• Elimination of double taxation.

• Restriction imposed on S-corporations.
• The tax treatment can be complex.