S Corporation: Pros and Cons to an S Election
An S Corporation has the benefits of both worlds, corporate and partnerships. S Corporations are taxed similar to that of partnerships, yet has the limited liability from creditors that is experienced in corporations. Like C Corporations, S Corporations are considered their own legal entity. Like a Partnership, S Corporations allow the deductions, revenue, losses and tax credits to flow through the entity and to each individual taxpayer ().
To start or change to an S Corporation, certain criteria must be met concerning who owns the company, as well as what the product or service they provide is. Nonresident alien shareholders will result in a business not being able to an S election. The business must also be domestic, meaning based in the United States, as well as have less than 100 owners and issue only a single class of stocks. All businesses are eligible for S Election, as long as they are permitted. Foreign companies, some banks and even insurance companies are a few restriction on the S Corporation rule.
To turn an S Corporation back to a C Corporation a few things must first occur, but it is possible to do. There are two ways to get rid of the S election, to revoke or lost. To revoke the S election would essentially take the business back to a C corporation and can be done as long as enough shareholders agree to it. The S election can be lost if the original criteria of the S election is changed by way of company changes. Basically if the company losses the small business corporations status, they are no longer eligible for the tax benefits of an S Corporation election.
If the S Election is meant to be dropped, it is best to do so before the fifteenth day of the third month, as to make the election dropped for the whole of the tax year. If the revocation is not turned in before that date, the year will be split up accordingly.
Reference
Hoffman, W., Maloney, D., Raabe, W., & Young, J. (2014). Comprehensive Volume, 2014 Edition. Mason, OH: South-Western, Cengage Learning.
