Business Structures
When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. Legal and tax considerations enter into selecting a business structure.
For additional information, refer to Small Business Administration’s Choose A Structure webpage.
S Corporations
S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.
To qualify for S corporation status, the corporation must meet the following requirements:
-
Be a domestic corporation
-
Have only allowable shareholders
-
including individuals, certain trust, and estates and
-
may not include partnerships, corporations or non-resident alien shareholders
-
-
Have no more than 100 shareholders
-
Have one class of stock
-
Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.
In order to become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation (PDF) signed by all the shareholders.
Filing Requirements:
| If you are an S corporation then you may be liable for… | Use Form… |
|---|---|
| Income Tax | 1120S (PDF) (Instructions for Form 1120S (PDF)) 1120S Sch. K-1 (PDF) ( Instructions for Form 1120S Sch. K-1 (PDF)) |
| Estimated tax | 1120-W (PDF) (corporation only) and 8109 |
Employment taxes:
|
941 (PDF) ( 943 (PDF) for farm employees)940 (PDF) 8109 |
| Excise Taxes | Refer to the Excise Tax web page |
Chart 2 – S Corporation Shareholders
| If you are an S corporation shareholder then you may be liable for… |
Use Form… |
|---|---|
| Income Tax | 1040 and Schedule E (PDF) |
| Estimated tax | 1040-ES (PDF) |
References/Related Topics
- Compensation and Medical Insurance Issues
- Employees, Shareholders and Corporate Officers
- S Corporation Stock and Debt Basis
- Special Rules for Health Insurance Costs of 2-Percent Shareholder-Employees (IRB 2008-2 Notice 2008-1)
- Other Business Structures
