A small business set up as a corporation may be able to elect to be treated as a Subchapter S corporation for tax purposes. The advantage of this election is that generally the Subchapter S corporation does not pay corporate taxes. Instead, they are passed through to the individual shareholders and reported on their individual income tax returns. In this case, the individual shareholders may have to pay tax on their earnings from the corporation even if they have not been distributed in the form of dividends.
There are certain requirements that must be met in order to qualify as a Subchapter S corporation:
There must be no more than 100 shareholders (members of a family can elect to be treated as one shareholder).
The corporation must have only one class of stock.
All the shareholders must be U.S. citizens or residents.
All the shareholders must be individuals, and not partnerships or other corporations.
The corporation must operate on a calendar year basis.
IRS Form 2553 must be filed to elect Subchapter S status.