How2Day: S Corporation Types of Businesses

"S corporations" refers to special business entities formed under subchapter S of the U.S. Tax Code. An S corporation receives an unique tax benefit in that profits "pass through" the corporate structure. Under the standard "C" corporation, the corporation is taxed on its profits and the shareholders in turn are taxed on the distributions made from the corporation. S corporations avoid this double taxation.

The Internal Revenue Service limits the number of shareholders an S Corporation is allowed to have. Shareholders represent the owners of a corporation. While 100 people is nothing to scoff at, it is a relatively small number in the business sense as large corporations, such as McDonald's or Microsoft have tens of thousands of shareholders. The IRS further limits who can hold shares in an S corporation. Typically, only individuals can hold shares in an S corporation unless an exception applies. Corporations and other business entities cannot be shareholders in an S corporation.

Stock represents ownership interest in a corporation. The amount of stock, called "shares," a person has usually dictates the amount of control that person has in the operations of the business. Standard C corporations can issue different classes of stock. Certain stocks may bestow the right to vote while others may provide for a more favorable distribution rate. S corporations must only have one class of stock. The stock in an S corporation typically bestows both voting and distribution rights to the shareholder.

The IRS mandates that S corporations be domestic. The shareholders must be U.S. citizens and cannot be non-resident aliens. The corporation itself must be formed in the United States; it cannot be based elsewhere. An S corporation retains its favorable tax status only as long as it meets this and the above mentioned requirements. If the corporation takes on more than 100 people or has a non-resident alien shareholder, then the corporation loses its S corporation status.

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