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What are the characteristics of an S-corp?

You have many options when it comes to business formation. If you decide you want to start a corporation, you will have to choose which type.

One option is the S-corp. The IRS defines this type of corporation as one that passes the burden of taxes to the owners. This option may work for some businesses, but it is not available to all companies as the law restricts the ability to use the formation option.

Explanation

With an S-corp, instead of the business paying taxes at the corporate level, all shareholders will pay taxes on their gains on their personal tax forms. This has many benefits for the business because it eliminates double taxation, where the business and shareholders must pay taxes, and reduces the overall financial burden on the business. An S-corp also is a little easier to manage than a C-corp due to different documentation and filing requirements.

Restrictions

If you wish to form an S-corp, though, you have to understand the perimeters. Not every business can use this type of formation. You can only have up to 100 shareholders, and they must be individuals who are US citizens and have no stake in the company, such as no partners. You also only get one type of stock that you can sell. The law also says certain types of businesses, such as insurance companies, cannot become an S-corp.

When you are forming your business, it is well worth it to consider all the options. An S-corp may be the perfect choice for some companies, but you need to be sure you meet all the requirements and understand what it means to be an S-corp.