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. 

S-Corp basics:

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. 

DISCLAIMER: The information provided is for general informational purposes only. Posts and other information may not be updated to account for changes in the law and should not be considered tax or legal advice. None of the articles or posts on this website are intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.