S-Corporations are a popular form of business “entity”, but what does it really mean and are there special rules you should know about? In this post, we discuss the basics of S-Corps, and, in two weeks, we explore what an “S election” means for your business in the long run.
First things first, an S-Corp is not really a special business entity – it’s a tax designation provided by the IRS that the business elects after it is created in your state of choice. That’s right! An LLC can elect to be taxed as an S-Corp too!
But, with benefits (which we’ll talk about later) come some special rules – – what are they?
- Each S corporation shareholder must be a U.S. citizen or resident.
- S corporations may not have more than 100 shareholders.
- S corporation profits and losses may be allocated only in proportion to each shareholder’s interest in the business.
- An S corporation shareholder may not deduct corporate losses that exceed his or her “basis” in corporate stock, which equals the amount of the shareholder’s investment in the company plus or minus a few adjustments.
- S corporations may not deduct the cost of fringe benefits provided to employee-shareholders who own more than 2% of the corporation.
- And most importantly, for startups, S corporations can only have ONE class of stock, which means it can’t offer “preferred stock” to investors.
Check back in two weeks as we continue this discussion.