Currently in :

S Corp

s-corp

A Complete Overview of S Corporations

When choosing a business structure, most entrepreneurs have two goals in mind: protecting personal assets from threats and avoiding business taxes on personal tax returns. Not long ago, S Corporations were the only option for business owners. Most S Corps have recently been replaced with limited liability companies (LLCs). But thanks to the Tax Cuts and Jobs Act (TCJA), S Corps are becoming a top option for business owners. But how does one know if opting for an S Corporation is right for them? In this guide, you’ll learn everything there is to know about an S Corp, including what is an S Corporation, eligibility requirements, S Corp filing instructions and the S Corp tax rate.

Table of contents

What is an S Corp?...Read more

Eligibility requirements for S Corps...Read more

The one class of stock requirement...Read more

Number of shareholders...Read more

Do S Corps get 1099?...Read more

S Corp taxes...Read more

C Corp vs S Corp...Read more

S Corp vs LLC...Read more

What is an S Corp?

The S Corp definition is a type of corporation or legal business entity in the Subchapter S of Chapter 1 of the Internal Revenue Code. Sounds confusing? Let’s break down the S Corp definition. An S Corp is an ordinary corporation that has opted for an S Corporation tax status. You’re eligible for a corporate shareholder’s limited liability when you form an S Corp. Limited liability is a type of legal protection for owners and shareholders and ensures an individual isn’t responsible for a company’s debt or losses. But with an S Corp, you’ll need to pay taxes as if you’re a partner in a partnership or a sole proprietor. Let’s look at some S Corporation examples. Say your company has five shareholders, all meeting IRS requirements. Each shareholder holds 20% of the shares. Or, the company has only two shareholders, one holding 60% of the shares and the other holding 40%. Both shareholders must file their own tax returns relating to the business profits.

Back to top

NPO

NPO

The benefits of incorporating as a nonprofit.

Share
Business Corporations

Business Corporations

The pros and cons of different ways to incorporate your business.

Share
S Corp

S Corp

Find out if forming an S Corporation is the right fit for your business.

Share
C Corp

C Corp

How C Corps, the most popular business structure, works and how it might be right for your business.

Share
LLC

LLC

Learn about the advantages for choosing an LLC over other business structures.

Share
Sole Proprietor

Sole Proprietor

Are you an individual business owner? Here’s why a sole proprietorship could be useful to you!

Share
Partnership

Partnership

Partnerships are a great way to create a team of like-minded people to meet business goals. Learn everything about partnerships!

Share
LLC Vs S-Corp Vs C-Corp

LLC Vs S-Corp Vs C-Corp

LLCs vs S corps vs CCorps: find out which is right for your company.

Share
NPO

NPO

The benefits of incorporating as a nonprofit.

Share
Business Corporations

Business Corporations

The pros and cons of different ways to incorporate your business.

Share
S Corp

S Corp

Find out if forming an S Corporation is the right fit for your business.

Share
C Corp

C Corp

How C Corps, the most popular business structure, works and how it might be right for your business.

Share

Back to top

Eligibility requirements for S Corps

There are certain requirements a company must meet for a company to qualify as an S Corp. First and foremost, the company must be a U.S. based company. So any plans for an offshore company, sadly, won’t qualify. Next, you’ll need to apply to form an S Corp using Form 2553. Let’s take a look at Form 2553 S Corp:
Eligibility requirements for S Corps
You’ll also need to make sure that your business doesn’t have more than 100 shareholders. A shareholder is an individual, company or institution that owns a share of the company’s stock, essentially owning the company. Married couples are treated as one shareholder. Other eligible shareholders include:
Eligibility requirements for S Corps
Ineligible shareholders include: nonresident aliens, foreign trusts, limited liability partnerships and limited liability companies with multiple members.

Back to top

The one class of stock requirement

Usually, companies have a class of shares, which is a type of stock with different voting rights. Corporations with an S status are only allowed to have once class of stock. This means that one class can have voting rights while the other doesn’t, a voting stock and a non-voting stock. This could come in handy if the shareholders are owned by family members and the family members want to give ownership to their children without losing control of the company. The shareholders with stock in the corporation all get the same amount of dividends or distribution of company profits. If the corporation dissolves or liquidates the business, asset distributions will be given to the shareholders at the same time. Giving out stock to more than 100 shareholders or to ineligible shareholders could put the company at risk of losing its S status.

Back to top

Number of shareholders

So we’ve already discussed that there can’t be more than 100 shareholders. If they want to have more shares than allowed, the shareholders will need to agree to an amendment showing the change. The exception to this rule is family members can choose to be counted as one shareholder.
Number of shareholders
A family member is considered someone of lineal descent from a common ancestor, not more than six generations from the youngest family member.

Quick tip

Employees can be shareholders in an S Corporation, leading to stronger awareness of daily operations, company branding and company relationships.

Back to top

Do S Corps get 1099?

Usually corporations, including S and C corps, do not receive 1099 forms. But they are required to send 1099s to all vendors, even corporations.
Do S Corps get 1099?
However, there are some exceptions. You would receive a 1099-MISC if you paid any attorney fees, even for corporations. Or for any gross proceeds paid to an attorney (like settlements for claims) or payments made to medical care providers that are for-profit. Remember that 1099-MISC forms are only used for services rendered and not for purchasing goods or merchandise. But the services must be related to the business and not for personal use. Companies would send Form 1099-A to S corporations if they helped sell secure property or Form 1099-B if they bartered exchanges together. They'll send Form 1099-K to S Corps if they made payments of $600 or more using credit or debit cards or third-party payment networks to the corporation for 2022 taxes and beyond. Payments made before 2022 must total at least $20,000 and have at least 200 transactions.

Back to top

S Corp taxes

Things can get a bit confusing when it comes to S Corporation taxes. S Corps don’t pay federal taxes in a typical way. Instead of paying taxes on their profits, the individual shareholders must pay taxes. If the corporation pays its employees a salary, it’s responsible for withholding federal taxes, including Medicare and Social Security. Then the company will need to file Form 941 quarterly to fulfill the scorp quarterly taxes requirement. Form 1120-S reports the company’s income, deduction and payments. The S Corp tax rate is minor and similar to an individual taxpayer. But the S Corp tax rate the owner pays is based on the participation of the business owners. Steps for S Corp filing federal income taxes:
  • Fill out a corporate tax return using form 1120-S.
  • Share the profit and loss for each shareholder using the K-1 Schedule.
  • Shareholders use the K-1 to file income taxes.

Back to top

C Corp vs S Corp

Regular corporations, or C Corps, are taxed on business profits, meaning the business itself is taxed. Owners pay taxes on their salary or bonuses. C Corps are essentially taxed twice. The company pays federal income taxes, and shareholders pay taxes through dividends. On the contrary, an S Corp business doesn't pay taxes, meaning there’s no corporate tax. Instead, the owner reports the company earnings as personal revenue. The formation of a corporation is different from a C Corp vs S Corp. When a company is formed, it’s automatically considered a C Corp. If you want the S Corp designation, you’ll need to apply for this using Form 2553. When it comes to ownership, C Corps have a lot of freedom, since anyone can be an owner, and you can have unlimited owners. On the other hand, ownership with an S Corp is limited to U.S. citizens with less than 100 company shareholders.

Back to top

S Corp vs LLC

An LLC, or limited liability company, protects the owner from being held accountable for a company’s debt or losses. LLCs and corporations can be taxed as an S Corporation if they elect that status. An LLC is taxed like a partnership or sole proprietorship. This means, as an owner, you’re considered self-employed and need to file your own local, state and federal taxes, including Social Security and Medicare taxes. But with S Corp taxes, things are a bit different. If you’re an S Corp owner, you can consider yourself an employee for tax purposes and therefore enroll yourself on the company’s payroll, avoiding self-employment taxes. LLCs have a lot more freedom when it comes to the number of shareholders since there’s no limit. S Corporations can only have up to 100 shareholders with either individuals or certain trusts as owners. LLCs also don’t face as many regulations as corporations. LLCs can have multiple equity classes, whereas S corporations have the option of a single class of stock. Depending on your business needs and goals, there are pros and cons to an S Corp vs LLC. Therefore, it's best to weigh out both options before choosing what's best for your business.

Back to top

What’s FlyFin?

FlyFin caters to the tax needs of freelancers, gig workers, independent contractors and sole proprietors. But anyone can file taxes through FlyFin! FlyFin tracks all your business expenses automatically using A.I. to find every possible tax deduction. Then, our CPA team files a guaranteed 100% accurate tax return for you – to save you a couple thousand dollars and a ton of time on your taxes. Download the FlyFin app and have your taxes filed in less than fifteen minutes, saving time and more money on your taxes than last year, guaranteed.
Pondering Businesswoman

Need help navigating your taxes?

FlyFin's A.I. and 24/7 CPA support will guide you.

Get Started

Is this article helpful for you?
Yes
No