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Definition

S corporation

S corporation refers to business enterprise allowed by the IRS for most companies with 75 or fewer shareholders, enabling the company to enjoy the benefits of incorporation while being taxed as if it were a partnership.


S corporation is the corporations that do not pay corporate taxes on profits; instead, profits are distributed to shareholders, who pay individual income taxes.


S corporation refers one that may elect under Subchapter S of the internal Revenue Code, to be taxed as a sole proprietorship, if owned by one stockholder, or as a partnership, if owned by several stockholders.

The Subchapter S Revision Act 1982 made several significant changes in the conditions and qualifications that apply to S (formerly called Subchapter S) corporations. Major conditions are:

1. The firm must be cahartered in the United States.

2. Only one class of stock may exist.

3. A maximum of thirty-five stockholders is allowed. 

4. Shareholders must be individuals or estates.

5. Nonresident aliens and other corporations are not permitted to be shareholders.

6. All shareholders must agree to have their corporation taxed as an S corporation.

7. S corporation status may be terminated by a majority vote of the shareholders. (Under previous regulations, one minority shareholder could prevent the terminbation of S corporation status.)

8. The Internal Revenue Service may terminate S corporation status for a company whose passive income (from royalties, rents, dividends, and interest) exceeds 25% of annual gross sales for a 3 consecutive years. Federal income tax must be paid on the excess amount in any given year.


A corporation with 35 or fewer owners that files an income tax return as a partnership to take advantage of lower tax rates.

 

 

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