One of the major reasons people elect S status for their corporation is S corporation status allows an owner of the corporation (i.e. a shareholder) to apply the income and losses reported by the company on their individual tax returns. The S corporation election is favored under the following circumstances:

1. The shareholders earn less than maximum amount subject to Social Security tax ($87,000 for 2003).
2. The shareholders actively participate in the business.
3. The corporation plans to distribute most of its annual profits to its shareholders.

The rationale behind the above is that the corporation can pay the owner a reasonably small salary (which is subject to Social Security and Medicare tax). Then, the corporation can pay a relatively large distribution of profits (on the Schedule K-1 form – which is not subject to Social Security and Medicare tax). This may save the 15.3% Social Security/Medicare tax on a sizable chunk of income.

In order to qualify for S corporation status, a few requisite measures must be met.

• The corporation must be formed as a general, for-profit C class corporation.
• Be sure that your corporation has only issued one class of stock.
• All the shareholders are U.S. Citizens or Permanent Residents.
• There can be no more than 75 shareholders.
• Your corporation’s passive income level does not pass the 25% of gross receipts limit.
• If your corporation has a tax-year end date other than December 31, you must file for permission from the IRS.

If your corporation has met all the above, you may file form 2553 with the IRS to elect S status.

The limited liability company can be owned by, corporations, other LLC’s, partnerships, trusts and non-US citizens, non-resident aliens. The S corporation, on the other hand, can only be owned by individual US citizens or permanent resident aliens. An LLC may offer different levels/classes of membership while an S corporation may only offer one class of stock. An LLC may have any number of members but an S corporation is limited to a maximum of 75 shareholders. When a shareholder of an S corporation is sued in a personal (not a business) lawsuit, the shares of stock are assets that may be seized. When a member of an LLC is sued in a personal (not a business) lawsuit, there are provisions to protect the membership from being taken from away from the individual.

If one chooses to convert a C corporation into an S corporation the filing date is March 15. If you have recently incorporated; however, your corporation may file for S status anytime during the tax year within 75 days of your incorporation date.