As you start down the road to forming your own business and learning how to incorporate a business, one of your first decisions is choosing the type of entity your business will take. This choice often comes down to forming a corporation or an LLC. If the corporate option is selected, many new business owners immediately turn their sights to the S corporation election to avoid double taxation.
There's a common misconception that the S Corporation election allows a business to enjoy the best of both worlds (a real corporation with the characteristics of an LLC), but this is not entirely true. Many also believe that S Corporations are identical to standard C Corporations, except for the pass-through taxation aspect. This also is not true, as a corporation must meet these requirements before electing to be an S Corp:
There's a common misconception that the S Corporation election allows a business to enjoy the best of both worlds (a real corporation with the characteristics of an LLC), but this is not entirely true. Many also believe that S Corporations are identical to standard C Corporations, except for the pass-through taxation aspect. This also is not true, as a corporation must meet these requirements before electing to be an S Corp:
- The corporation must be a US corporation,
- There cannot be more than 100 shareholders,
- There can only be one class of stock,
- All stockholders must be US citizens or resident aliens, and
- Shareholders must be individuals. This means shareholders cannot be LLCs, for example, but some trusts or estates will still qualify.