What are the Disadvantages of an S Corporation?
-Corporate formalities: as with the C Corp, the S Corp also requires corporate formalities to be maintained in order to ensure compliance with the law and maintain corporate status. This includes holding and documenting annual meetings of shareholders and directors and keeping minutes of important corporate meetings.
- must file for S status every year. Electing to be an S Corp is not a one time thing. You or your accountant must remember to elect to be an S Corp every year (by the deadline!). For some, this can be annoying.
- various S Corp Restrictions:
- The maximum number of shareholders for an S Corporation is 100
- S Corporation ownership limited. (only individuals, estates, and certain trusts in which the interests in the trust must be acquired by gift or bequest -- not by purchase – can own an S Corp; Nonresident aliens cannot be shareholders (i.e. Only citizens or residents of the U.S. can own an S Corp)
- S Corporations may only issue one class of stock.
- No more than 25% of the gross corporate income may be derived from passive income.
- Not all domestic general business corporations are eligible for S Corporation status. These exclusions include:
- Banks, Insurance companies taxed under Subchapter L, a Domestic International Sales Corporation, or certain affiliated groups of corporations.
This list is not all inclusive. For more detailed information and other aspects regarding S Corporation status, contact your accountant, attorney or local IRS office.
*What are the Advantages of an S Corporation?
The advantages of an S Corp are the same as that of a C Corp plus:
Pass-Through Taxation: The S Corporation does not have a separate tax status from its owners and there is therefore usually no double taxation.