An Overview on Subchapter S Corporations Law

Use these links to jump to different sections:

• Overview
• Common Questions for an Attorney
• Finding the Right Attorney for Your Needs
• Why Should I Talk to a Lawyer?

When you are setting up a business, you have different options for the legal structure, all of which will offer you different tax benefits and drawbacks. One popular option is found in Subchapter S of the Internal Revenue Code (IRC).

If you are considering taking advantage of this subchapter’s tax benefits, you might find it helpful to speak with an experienced lawyer. The following is an overview of S corporations so you feel confident speaking with a lawyer.

Overview

An S corporation is a closely held corporation that is taxed under Subchapter S of the IRC.

For federal tax purposes, S corporations pass corporate income taxes, losses, deductions, and credits to their individual shareholders. In other words, S corporations avoid double taxation through distribution of taxes directly to S corporation shareholders. This “pass through” function differs from C corporations, which pay taxes at both the corporate level and the individual shareholder level.

Not every corporation can take advantage of this subchapter, and there are some benefits and drawbacks to forming an S corp.

Formation

The basics of forming an S corp are essentially the same as forming any corporation. You will need to choose a name and file articles of incorporation with your state. Once you are incorporated, you can issue stocks to your shareholders and apply for any identification numbers your state requires, such as tax ID numbers. Finally, you will need to file required forms with the Internal Revenue Service (IRS), including Form 2553: Election by a Small Business Corporation.

There are some special filing requirements to follow if you want to qualify for S corporation status:

• You must have a domestic corporation, which requires that you be a United States citizen
• You cannot have more than 100 shareholders
• Your corporation must issue only one class of stock

Once your business qualifies as an S corporation for income tax purposes, you will use Form 1120-S for income tax returns.

Pros and Cons

If you are considering creating an S corp, you will want to consider the benefits and drawbacks. Subchapter S gives you the benefits of a corporation while taxing you like a partnership. It provides limited liability protections to shareholders, and money is not taxed twice as corporate income and dividend income. The subchapter creates a system of taxation where owners report their profit and losses on their individual taxes and pay them at that rate.

Because of the tax benefits of this type of corporation, you may be subject to more IRS scrutiny. This might mean being subjected to more audits of your returns to make sure you are following the requirements, including the small number of shareholders allowed and how you are distributing payments to shareholders.

Common Questions for an Attorney

Below are some common questions you might want to consider when meeting with an attorney for legal advice:

1. What is your experience as a business organization lawyer?
2. What business structure—for example, limited liability company (LLC), limited partnership, or S corp—is best for my business?
3. How will an S corp structure impact my self-employment taxes as compared with a sole proprietorship or other business structure?
4. What identification numbers do I need to apply for?
5. How do I file articles of incorporation?

Finding the Right Attorney for Your Needs

It is important to approach the right type of attorney—someone who can help you through your entire case. To do so, you can visit the Super Lawyers directory, and use the search box to find a lawyer based on your legal issue or location.

To help you get started, you may want to consider looking for a business organization lawyer.

Why Should I Talk to a Lawyer?

Subchapter S has strict requirements and increased scrutiny, so it is important to make sure you set up your corporation correctly. The Internal Revenue Code can be hard to understand and there are consequences for misunderstanding it, and your lawyer will understand the code and how it affects your business plans.

A lawyer will further be able to anticipate potential problems with your plans and advise you on how to approach them, and they will also keep track of deadlines and file all the paperwork with the necessary courts and agencies—giving you one less thing to worry about.