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An S corporation is sort of a hybrid between a regular corporation, called a C corporation, and a sole proprietorship or partnership. Unlike a regular corporation an S corporation's income "passes through" the business and into yours. Meaning it is taxed on the shareholder's Form 1040 at their personal tax rate and is not a separate entity from it's shareholders. Profit or loss is divided between all shareholders, usually in equal parts but not always.

Qualifications
There are a few guidelines you must meet in order to become an S corporation. These rules all limit the size and complexity of the company to ensure that it is actually a small business. Some of these rules are as follows...

- It must be a domestic company, meaning based in the U.S. and run under U.S. laws.
- Must only have one class of stock
- Have 100 or less shareholders
- All shareholders must be individuals, or estates and trusts.
- Non-resident aliens may not become shareholders
- All shareholder must agree to become an S corporation and file Form 2553

There are other qualifications, but the majority of businesses can apply if they meet the criteria above.

How to Get Your S Corporation Started
Starting the ball rolling on your S corporation's federal tax status is very easy. First, all shareholders must sign and return Form 2553, Election by a Small Business Corporation. This is just your application. The Form must reach the IRS by the 15th day of the third month of the companies current tax year. For example, if a company uses the calendar year for tax purposes than they must submit Form 2553 by March 15th of that year. Or for example, if they started May 1st then they must file all paperwork by July 15th.

Once an S corporation is formed it continues as one until the shareholders elect another status or the IRS disqualifies the corporation. If for any reason the shareholders elect another status they can return to S corporation status again, but there is a waiting period.

Taxes S Corporations Pay
- Federal Income Tax- S Corporations don't pay federal income tax, but their owners do. Every year they must file Form 1120-S, which unlike Form 1120, is informational only. Profit or loss is recorded on Schedule E and attached to the owner's Form 1040. All shareholders must submit their income on their returns.

- State Income Tax- State laws vary so it is best to consult with a tax professional or similar business to find out the laws and filing procedure in your state.

- Employment Taxes or Federal

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