Incorporation of S-Corporation

Incorporation of S-Corporation

Concept and Features of S-Corporation

An S-Corporation is a form of corporation registered under the laws of one of the U.S. states that has elected a special tax regime under Subchapter S of the U.S. Internal Revenue Code. This status allows the company to avoid double taxation: profits and losses are distributed among shareholders and reported on their individual tax returns.

Key Requirements for S-Corporation

To obtain and maintain S-Corporation status, a company must meet several requirements set by the IRS (Internal Revenue Service). Key conditions include:

• The company must be registered as a corporation (C-Corporation) in one of the U.S. states.
• All shareholders must be individuals - U.S. residents or citizens.
• The total number of shareholders must not exceed 100.
• Only one class of stock is permitted.
• The company must not be of certain types, such as a bank or insurance institution.

Taxation and Financial Structure

An S-Corporation does not pay federal corporate income tax. Instead, profits are distributed to shareholders proportionally to their shares and included in their personal tax liabilities. This helps minimize the tax burden and simplifies the tax structure compared to a traditional corporation (C-Corporation).

At the same time, an S-Corporation must maintain accounting records, file tax returns (Form 1120-S), and comply with legal requirements regarding profit distribution, payroll for participants, and other financial operations.

Legal Status and Corporate Governance

An S-Corporation is a separate legal entity and is liable for its obligations independently of its shareholders. This form provides limited liability protection for participants, clear corporate governance, and the ability to attract investments through the issuance of a single class of stock.

Corporate governance is carried out through the election of a board of directors, appointment of officers, and maintenance of corporate documentation, including meeting minutes, shareholder resolutions, and internal regulations.

Application and Benefits

An S-Corporation is suitable for small and medium-sized businesses, including family businesses, professional services, and startups with a limited number of owners. This status allows owners to optimize taxes, retain control over management, and ensure legal protection of personal assets.