An “S Corporation” is a for profit corporation which elects to be treated as an S Corporation. S Corporations typically do not pay taxes and instead file an informational return Form 1120S showing net profit or loss which flows through to the owners (shareholders). Instead of the S Corporation paying income tax, the shareholders show the net profit or loss on their personal tax returns. An S Corporation starts as a regular corporation, and only by requesting the S Election to the IRS can it act as an S Corporation.
Profits and losses must be distributed to the shareholders in proportion to the shareholder’s interest. For example, if a shareholder owns 10 percent of the S corporation, he or she must receive 10 percent of the profits or losses.
Shareholders must adhere to the requirements at all times. If they don’t, they risk disallowing the S corporation election, the corporation would be treated as a C corporation with its corresponding restrictions and be subject to double taxation.
To become an S Corporation, the corporation must submit a completed Form 2553 (S Corp. Election) to the IRS 2 months and 15 days after the beginning of a corporation’s tax year. For most S Corps, that would be on March 15th since most tax years begin on January 1st. For newly formed corporations, the first tax year would start on the earliest of the date it first had assets, the date it first had shareholders, or the date it first operated.
For example, if a corporation was formed on March 12th, it issued stock on April 10th, it opened a checking account on April 17th, and started business operations on July 1st, the beginning date of the S Corporation’s first tax year is April 10th. Therefore, the IRS must receive the S Corp election no later than June 25th for the S Corporation election to take effect during its first tax year. If received after this, the corporation wouldn’t be able to operate as an S Corporation until January 1st of the next tax year.