Clearing up the misunderstandings of S Corporations. S Corporations are a limited liability entity when it is properly formed, no different than a C Corporation. You can not simply declare yourself an S Corporation though, you must first file the proper paperwork with the IRS. Pass through tax treatment, is also a benefit of an S Corporation and where items of income, or loss, are passed along to the individual owner’s return.
Mark J. Tarallo, Esq. is a partner in the corporate department at Morse, Barnes-Brown & Pendleton, PC, in Waltham, MA. Mark has extensive experience in the mergers and acquisitions area, representing both buyers and sellers, and has represented companies ranging in size from startups to multinational corporations across a wide range of industries.
Robert Finkel, Esq. is an AV-rated attorney who has more than 25 years experience as a tax and business lawyer, with his practice focused on the areas of individual and business taxation including tax controversy and tax litigation.
In this CLE class clip, Mark & Robert discuss S Corporations.
After you make a forming your C Corporation and get a tax ID number from the IRS, then you file form 2553, which is and election to be treated as a sub chapter S Corporation. This form has basic information about the shareholders of the corporation. Once you get your acknowledgment from the IRS approving the filing, make sure you keep this document with your corporation papers for future reference. This process should be taken care of within 75 days of your formation.
Another stipulation, the S Corporation is held to only 100 shareholders. All shareholders have to be resident aliens, or natural citizens of the United States. If you have an owner who is a resident alien, and they lose their resident status, you should create a shareholders agreement that if such an event happens, the shares owned by the resident alien owner will be offered to sale to the company. This will eliminate the problem of a non-resident alien as an owner, which would cause you to loose your S Corporation filing.