Business Subchapter S Corporation

A business subchapter S corporation derives its title from the taxation codes that these company structures fall under according to Chapter 1, subchapter S of the Internal Revenue Service’s Internal Revenue Code.  Earnings from these subchapter S corporations are not taxed as personal incomes, however, as earnings to be paid to amongst the company’s shareholders.  Aside from earnings, the losses of the company will also be divided amongst shareholders within a business subchapter S corporation.  Individual shareholders will then report their personal earnings or losses on their personal income tax returns, however, a tax lawyer should always be counseled prior to making any and all local, state, and federal income statements.  In regards to taxation rules, a business subchapter S corporation provide the same benefits of having a business partnership in terms of taxation, however, the main differing asset of implementing a business subchapter S corporation derives from the limited liability shareholders in the organization expose themselves to in the event of detrimental events. 

In order to qualify for business subchapter S corporation status, there are several integral steps.  These steps can be confidently implemented alongside the advice and counsel of a business lawyer. 

 

 

Some of the details that allow a company to retain business subchapter S corporation status include:

  • Offer only one class of stock
  • Has no more than one hundred shareholders
  • Shareholders must be residents of the United States
  • Equitable sharing of earnings and liabilities for all shareholders per their shareholding amount
  • Company must be a legal, eligible corporate entity itself

Often times, the question of what constitutes an eligible entity arises amongst persons interested in starting or investing in a business subchapter S corporation.  An eligible entity is a domestic corporation or a limited liability company. A domestic corporation, in terms of the United States, is one organized to do business in more than one state even though the organization is licensed with one individual state’s department of commerce.  In essence, a limited liability company is a business with the qualities of both a corporation and a partnership, while offering limited liability to its individual owners or shareholders.  In many practical instances, business subchapter S corporations are used most often for small business owners and entrepreneurs, because of the obvious limited liability benefits, opportunity for external investors, and retention of primary control of company operations at the sole discretion of the majority shareholder, which if structured intelligently, will be the company owner or partners. 

As part of United States commercial law, all business subchapter s corporations must follow certain rules and regulations to continue operations within the scope of the law, and in turn, successfully.  For example, these types of corporations must have annual meetings with all shareholders present and a comprehensive recording of the meeting minutes must be compiled and retained within the company’s records.  Another additional piece of information to note is that business subchapter S corporations do not cease to exist when its members pass away, which contrasts to the lifespan of a limited liability corporation.  In a business subchapter S corporation, the ownership can be transferred through the company’s stock as opposed to a limited liability corporation. 

 

 

To reiterate and expound upon the advantages of the business subchapter S corporation, the benefits can include limited liability for the officers, directors, shareholders, and employees, attraction of investors through the sale of stock or shares, and perpetual existence even if an owner decides to leave the business. Most of the businesses that qualify as a business subchapter S corporation do so through avoiding any double taxation for company owners and operators.  Additionally, all employee salary expenses, personal expenses, and various other items are tax deductable under the guise of being a business expense.  A competent tax lawyer will always work to aggressively mitigate the tax liability any business subchapter S corporation will face.

 

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