S corporations are very attractive to many small business owners. They have some very attractive features such as the ability to pass through dividends without double taxation and still provide a degree of liability protection. For a corporation to qualify as an S corporation it must meet certain basics. It must have no more than 75 shareholders. The shareholders have to be individuals, estates, certain kinds of trusts, tax exempt charitable organizations and it can even have another S corporation as the shareholder as long as it is the sole shareholder. A husband and wife count as only one shareholder.

The cash method of accounting is allowed, which is much easier and cheaper to administer than the accrual method. They must also have minutes, resolutions and by-laws just like regular or C corporations. An S corporation is only allowed to issue common stock unlike C corporations which can issue preferred stock.

In order to become a Subchapter S corporation, the corporation must make the election no later than two months and 15 days after the first day of the taxable year. The consent of all shareholders is required in order to make the election. The Subchapter S status can be revoked by the corporation by filing with the IRS no later than two months and 15 days after the first day of the taxable year. After that the business will be taxed as a corporation.

Many people utilize S corporation in order to save on self employment taxes. Historically this has worked. However, recently the IRS has been taking the position that some of the dividends are actually salary and therefore subject to self employment taxes. So, there may not be as great a benefit in this area in the future as there has been in the past.