16427 N. Scottsdale Rd. Ste 410
Scottsdale, Arizona 85254
Standard business corporations or C corporations are required to pay income tax on taxable income generated by the corporation. By completing and filing federal Form 2553 with the IRS, your C-corporation will elect sub chapter S election. This is a way to avoid having your corporation treated as a separately taxed entity.
An S corporation is a standard business corporation that has elected a special tax status with the IRS. This tax treatment allows the corporation not to be a taxed separately. Instead, the income of the corporation is treated like the income of a partnership or sole proprietorship in that the profits or losses of the company “flow through” or are “passed-through” to the shareholders. Therefore, the shareholders’ individual tax returns report the income or loss generated.
Most small business owners naturally will avoid double taxation by paying out income in the form of salary and bonuses. Both salary and bonuses, and any other form of employee compensation, are direct reductions from the net income of the corporation, hence taxing the owner only once, at the individual level.
In order to qualify for S corporation status, the corporation can have no more than 75 shareholders, who must all consent in writing to the election to be an S corporation. The shareholders cannot be non-resident aliens. Also, an S corporation can have only one class of stock (Common Stock).
S corporations are subject to restrictions imposed by the IRS on who can be owners.
Owners (shareholders) must meet the following criteria: