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Corporation Formation

An S-Corporation is a closely held corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S corporations do not pay any federal income taxes. Instead, the corporation’s income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns. S status combines the legal environment of C corporations with U.S. federal income taxation similar to that of partnerships. A small business corporation is a domestic corporation that does not:

  • Have more than 100 shareholders;
  • Have as a shareholder a person who is not an individual (except for, with limitations, an estate, trust, and certain kinds of tax exempt organizations);
  • Have a nonresident alien as a shareholder; and
  • Have more than one class of stock.

A limited liability company (LLC) is also eligible to be taxed as an S corporation. The LLC first elects to be taxed as a corporation; then it makes the S corporation election under section 1362(a).

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