Subchapter S Corporation: What is it?

A subchapter S corporation, also known as a “S-Corp” begins like most other corporations – as a profit corporation. Adding the Subchapter S designation occurs when you apply with the IRS, and meeting all requirements, are awarded the Subchapter S designation to use for tax purposes.

Chapter 1 of the IRS Code covers Subchapter S / S-Corps. IRS form 2553 covers election of a corporation of Subchapter S status.

Subchapter S corporations generally don’t pay any income taxes. Instead, any income or loss created by the corporation is divided among, and passed on to the shareholders in the corporation. Shareholders then, are held accountable for the income or loss as filed on their individual income tax returns.

An S corporation gives it’s owners many of the same benefits as partnerships do in the way of taxation – and at the same time having a subchapter S corporation gives some protection from creditors to the business in the case of default on loans. All Subchapter S corporation rules are contained in the IRS Code 1361 to 1379.

Subchapter S corporations, the same as partnerships, operate with income, deductions, and tax credits of the S corp flowing through – to the shareholders annually. As a result the corporate income is taxed at the level of the individual shareholder, and not at the corporate level.

These taxes don’t apply to Subchapter S corporations:

• accumulated earnings tax
• personal holding company tax
• alternative minimum tax

To be lawfully treated as an S Corporation, companies must meet the following tests.

Tests for S Corporation Status:

• Must be a domestic corporation, or a LLC (limited liability company)
• Must have just one class of stock
• Must have less than or equal to 100 shareholders (special rules about who is defined as shareholder in the case of family members.)
• Shareholders must be citizens of the USA or residents, and must be actual persons.
• Shareholders share profits and losses proportionate to their interest in the Subchapter S business.

If a legal corporation meets all the previous requirements and wishes to be taxed under Subchapter S, its shareholders can file Form 2553: “Election by a Small Business Corporation” with the IRS. The Form 2553 must be signed by all of the corporation’s shareholders. If a shareholder resides in a community property state, the shareholder’s spouse generally must also sign the 2553.

If you wish to elect the Subchapter S designation you must file IRS form 2553 by the 15th day of the 3rd month of the tax year you wisht the election to be effective, or at anytime during the previous year. Sometimes the IRS is flexible about letting a late Subchapter S election get approved – congress has directed the IRS to show leniency with late submissions.

Some states require a separate state level Subchapter S election.

Georgia is not one of these states.

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