by Kateryna Patskovska

Created on: October 21, 2007   Last Updated: April 08, 2008

Let's first define what a corporation is. A corporation is a legal business entity that is separate from its owners. It has unlimited life, extending beyond of its owners. In a corporation the personal liability of the owners is limited when it comes to claims against it.

What is an S corporation? Well it is NOT a separate business structure, but rather a corporation that has elected to be treated differently by the IRS, for tax-purposes ONLY. Remember that double taxation DOES NOT apply to the S corporation. In order to qualify and become an S corporation you MUST meet certain guidelines. These guidelines are as follows:

It must be a registered US corporation
It has to contain only one class of stock
The number of shareholders has to be less than 75
These shareholders need must be individuals, estates or certain qualified trusts
The share holders must agree, in writing, on S corporation election
Share holders CANNOT BE NON-RESIDENT ALIENS.
When the corporation meets all the above guidelines then it is viewed by IRS as an S corporation, for tax-purposes ONLY.

The main purpose of becoming an S corporation is to avoid taxation on a corporate level. When filing taxes S corporation must fill out a Form 2553, Election by a Small Business Corporation, and accept to be taxed similarly to a partnership. This means that the income and losses of the S corporation are (passed through) or taxed only once. Furthermore, the profits or losses are reported on the individual tax returns of the shareholder's.
There are two tax forms that S corporation must file. As an S corporation it must file a tax form separate from the shareholders' tax forms. These forms are as follows:
Form 1120 and 1120S for income taxes
The forms above also included in the order (depending on what your S corporation does):
Form 8825-rental real estate income and expenses of a partnership or an S Form 8050-
Form 4136-credit for tax paid on fuels
Additional schedules in alphabetical order-Schedule K-1 to report shareholders' individual incomes and losses
Additional forms in numeric order.

As a shareholder for S corporation you will file Form 1040, individual tax form and Schedule E. Schedule E is used to report income and losses. In addition you may need to file Form 1040 ES for estimated tax.

Although S corporation can file taxes similar to partnership there is still ONE important difference between partnerships filing taxes and S corporations. That difference is the way losses and profits are allocated

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