An S-Corporation (S-Corp) is a US business entity that combines corporate liability protection with pass-through taxation under IRS Subchapter S. The following is an exhaustive glossary of terms, regulations, and compliance.
Core Definitions
| Term | Definition |
|---|---|
| S-Corporation | A legal entity electing IRS Subchapter S status (on Form 2553) to pass income, deductions, and credits to shareholders, avoiding double taxation. |
| Pass-Through Taxation | A tax system that transfers business income to individual shareholders’ tax returns to exclude federal corporate income tax. |
| Shareholder | A person, trust, or estate that owns shares in an S-Corp. Limited to 100 shareholders, all of whom must be U.S. citizens or residents. |
| Form 1120-S | The IRS form to file an S-Corp’s income, losses, deductions, and credits. Shareholders get Schedule K-1 to report their share. |
| Reasonable Compensation | A mandate that shareholder-employees receive a market-rate salary subject to payroll taxes (FICA), avoiding IRS reclassification risk. |
| Subchapter S Election | The formal process of making the S-Corp election by filing Form 2553 with the IRS within 75 days of incorporation. |
Tax and Compliance Terms
| Term | Definition |
|---|---|
| Schedule K-1 | A report issued to shareholders detailing their allocable share of the S-Corp’s income, deductions, and credits for reporting on their personal tax return. |
| Basis Calculation | An investor’s interest in the S-Corp used to determine taxable gains or losses on sale or distribution. |
| Built-In Gains Tax | A 21% federal tax on S-Corps disposing of assets that appreciated during five years from C-Corp conversion. |
| Accumulated Earnings Tax | A penalty tax imposed if the IRS finds an S-Corp earns more than is needed for the business. |
S-Corp vs. LLC Taxed as S-Corp
| Element | S-Corporation | LLC Taxed as S-Corp |
|---|---|---|
| Legal Structure | Issued stock formal corporation. | Flexible S-Corp LLC structure using Form 2553. |
| 1099 Reporting | No—corporations exempt from 1099-MISC on services. | Yes, if the LLC is treated as a disregarded entity and paid $600+ for services. |
| Operational Flexibility | Must have corporate formalities (e.g., bylaws, board meetings). | Has an LLC agreement, with less procedural requirements. |
IRS Compliance Requirements
1. Eligibility:
Maximum of 100 shareholders; no non-resident alien shareholders.
Single class of stock (variations in voting rights permitted).
2. Tax Filing:
- Form 1120-S filing due March 15; extensions to September 15.
- Shareholder Schedule K-1s must be sent by March 15.
3. 1099 Rules:
- Do S-Corps get 1099? Exempt under IRS rules except for an LLC form.
- Do LLC S-Corps get 1099? Required if payments for services more than $600 and the LLC is not taxed as a corporation.
| Advantages | Disadvantages |
|---|---|
| Prevention of double taxation. | More restrictive ownership and operating requirements. |
| Shareholders have limited liability protection. | Greater administrative expenses (e.g., filings, payroll). |
| Less self-employment tax on distributions. | Penalties for mistakes in calculation of salary or basis. |