Articles · Basics · S Corporations and Form 1120-S
S Corporation Basics: Rules and Benefits
An S corporation is a corporation that elects to pass income, losses, and credits through to its shareholders. It generally pays no federal income tax itself.
Eligibility
Under Section 1361, an S corporation can have no more than 100 shareholders, and only one class of stock. Shareholders must generally be individuals, certain trusts, or estates. Nonresident aliens, partnerships, and corporations cannot own shares.
The election is made on Form 2553 and all shareholders must consent.
How income is taxed
The company files Form 1120-S, generally due March 15 for calendar years, and gives each shareholder a Schedule K-1. Shareholders pay tax on their share of income whether or not cash is distributed.
Items are allocated per share, per day, so owners cannot freely split profits the way partners sometimes can.
Protecting the election
Disproportionate distributions can raise a second-class-of-stock question. Transfers to an ineligible shareholder end the election. Relief may be available for inadvertent terminations, but it is better to prevent problems with clear shareholder agreements.
Key takeaways
- Check shareholder and stock rules before electing.
- Shareholders are taxed on income, not on cash received.
- Allocations follow share ownership.
For general education only, not tax advice. Tax law changes often, so confirm current rules and amounts with primary sources.