When deciding what business entity to choose, many small business owners will only focus on the tax advantages. An S Corporation (or a Limited Liability Company electing to be taxed as an S Corporation) is the entity choice of many new start-up businesses. However, businesses that choose this entity must be sure that they meet and continue to meet the IRS rules that qualify them as S Corporations. Whether your corporation has been an S Corporation for several years or you are a new business owner still deciding on what entity to choose, it is a good idea to review the basic requirements for S Corporations.

To be an S Corporation, a corporation……

1. must not have more than 100 shareholders

2. shareholder’s must be individuals and certain trusts & estates (partnerships, corporations, & non-resident aliens cannot be shareholders)

3. must be a domestic corporation

4. can only have one class of stock

5. cannot be an ineligible corporation (example: financial institution, insurance companies, & domestic international sales corporations)

Violating any of the above rules automatically ends the S corporation status. Some corporations have found that simply transferring stock to an ineligible shareholder or making disproportionate distributions between shareholders could terminate the S election. If you are questioning whether a transaction will affect your S Corp election, you should contact your tax advisor in addition to your attorney.