An S Corporation is a small business Corporation whose shareholders have made a choice to be taxed under personal income tax law rather than Corporation law.

An S Corporation is not treated as a separate taxable entitiy like a C Corporation. The S is for Chapter S of the IRS code.

No Corporate income tax is paid to the IRS for an S Corporation. For tax purposes net income is "passed through" the S Corporation to the personal income tax of the shareholders. With an S Corporation double taxation (paying both corporate and personal taxes) can be avoided while retaining all the legal protections of a C Corporation.

In addition, federal law allows a nontaxable Employee Stock Ownership Plan to hold stock in an S Corporation. This gives shareholders a way to defer some of their taxes. No tax is paid on these stocks until they are withdrawn from the Plan.

All corporations start out as a C Corporation. In order to be treated as an S Corporation a form must be filed with the Federal government within 75 days of incorporation of the C Corporation, or within 75 days of a new year.

S Corporation eligibility requirements include:

• Less than 75 shareholders
• All shareholders must be either US citizens or resident aliens, certain trusts, estates or organizations
• Business entities and non-resident aliens may not be shareholders
• Only common (not preferred) stock may be issued
• The end of the fiscal year must be Dec. 31 S

An S Corporation is required to hold corporate and shareholder meetings just like a C Corporation. An S Corporation is required to pay taxes only once a year (vs. quarterly for a C Corporation).

45 states accept a Federal S Corporation election if the Corporation has filed a valid IRS S Corporation Election form. In Arkansas, New Jersey, New York, Ohio, and Wisconsin, a separate state S Corporation election must be made.