S Corporation Shareholder Restrictions
S corporations are a heavily restricted type of business entity available in the United States. An S corporation must meet a set of rigid requirements, mostly regarding the number and type of shareholders it may have, but offers the benefits of lower taxation and regulation than a standard C corporation does.
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Number of Shareholders
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To obtain or maintain S corporation status, the corporation may not have more than 75 shareholders. A married couple always counts as a single shareholder for the purposes of calculating the total number of shareholders for the corporation.
Types of Shareholders
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Shareholders of an S corporation can be individual people (or married couples) and certain tax exempt entities (including charities and some types of estates or trusts). Most for-profit businesses, particularly other corporations and businesses, cannot be a shareholder of an S corporation.
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Individuals as Shareholders
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Individual shareholders must meet the age requirements in the state government in which the corporation is founded. Most states set the minimum age at either 17 or 18. All shareholders of an S corporation must be either residents or citizens of the United States.
Taxation
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The primary benefit of an S corporation over a C corporation is taxation. A S corporation does not pay federal income tax. Instead, the shareholders report their share of the corporation's income on their personal income tax forms as self-employment income.
Enforcement
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The federal government strictly enforces all requirements for S corporation status. A corporation can lose its status as subchapter-S if it fails to meet any of the shareholder requirements. If a corporation loses the subchapter-S status, it must reapply for this classification before March 15 of the following year.
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References
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