Subchapter S Corporations

Updated: April 1, 2024

Definition

The “S” in S corp refers to Subchapter S of the Internal Revenue Code¹ where the IRS regulates this special type of corporation.

S Corp v. C Corp

S corps are usually compared with C corps. S corporations provide favorable tax treatment, but impose ownership limitations which C corps avoid.

S corporations are pass-through entities for taxation of most business income. That means that S corps avoid double taxation of business income and dividend income for the owners.

The ownership structure of an S corp is much more restrictive than a C corporation.

To qualify as an S corporation under the federal tax code, an S corp must:

• Have no more than 100 shareholders,
• Have no legal entities as owners, and
• Have only one class of stock.²

S Corp v. LLC

While the S corp has a numerical advantage on LLCs, LLCs are growing faster as a preferred type of entity for small businesses.³

4.2 million S corps filed tax returns in 2012, compared to 2.2 million LLCs. However, the rate of growth in LLCs is higher.

LLCs have 3 advantages over S Corps:

1. LLCs have no limit on the number of owners,
2. LLCs have no limit on the legal entity types which can own the business, and
3. LLCs allow for a flexible management structure.

Basic information

After you form a S corporation, you must maintain it to keep it in compliance. Track the following information for a corporation:

• Legal name is official name on the Articles of Incorporation.
• Tax Identification Number (TIN) or Employer Identification Number (EIN)
• Address should be the principal place of business.
• Registered Agent or legal address is the place where you receive service of process.
• Website is not legally required but is part of standard contact information.
• Email is not legally required but is part of standard contact information.
• Phone is not legally required but is part of standard contact information.
• Place of Incorporation is the legal jurisdiction for registration. In the United States, legal entities are formed under state law.
• Legal Form is the type of legal entity. For C corporations, the legal form is “Corporation”.
• Tax Status is a determined by federal tax law. For C corporations, tax status is “Taxable”. C corporations are taxable and do not benefit from pass-through tax status. This means that profits of the business are taxed as income and distributions to shareholders are taxed as income to them.

Documents and filings

This table summarizes the types of C corporation documents and filings:

Compliance obligations

After forming a S corporation, it is important to track compliance obligations. Compliance requirements vary widely based on jurisdiction and line of business.

Here is how to design compliance tracking:

You should substitute actual filing requirements for your business. This table gives you a framework to capture the essentials of any compliance filing.

Officers and directors

S corporations sometimes have a Board of Directors corporate structure to separate ownership governance (a board of directors) from management (officers).

Most states require that corporations have a Board of Directors unless the shareholder agreement provides otherwise.⁹

People often serve more than one role so it is important to list officers and directors by role and not by name. In the long run, it is also helpful to track terms of service for each role and person.

Here is the information to track for officers and directors:

• Type of Role: officer, director, or other (consultant, lawyer, accountant, or auditor)
• Title: chair, director, President and CEO, Treasurer, Secretary, etc.
• Name: first and last name
• Start Date (term of service): date of appointment
• End Date (term of service): date appointment ends

Many boards use a committee structure to parcel out work among board members. The list of roles should also include committee assignments.

Please note that a person can have two different roles with very different terms of service.

Ownership

Corporate owners and investors are usually called “Shareholders” or “Stockholders”. Since S corps can only have natural persons as owners with only one class of stock, keeping track of ownership is straightforward.

You should capture the name of the owner and the percentage of ownership at a minimum.

Conclusion

To preserve the benefits of your legal entity, effective ongoing maintenance is critical.