Tuesday, January 13, 2009

Becoming An S Corporation

In order for a corporation to become an S corporation it must meet all of the requirements of an S corporation status. All of the shareholders must agree to the S corporation status. The corporation must use a permitted tax year, or it may elect to use a tax year other than a permitted tax year, and must file Form 2553, Election by a Small Business Corporation to indicate it chooses the S corporation status.

All of the following requirements must be met in order for a corporation to qualify as an S corporation:
Shareholders must be citizens or residents of the US
Must not be a financial institution that uses the reserve method of accounting for bad debts
Must have no more than 100 shareholders
Must be a domestic corporation
Must have only one class of stock
Shareholders must be individuals, estates, and certain trusts and financial institutions
Shareholders cannot be corporations or partnerships

When setting up a business the business owner usually has a few different options with pros and cons to each method of organization. A CPA should be consulted in order to make the best decision in setting up the new organization.

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