An S corporation is a special type of corporation that is designed to avoid the double taxation that typically affects regular corporations (C corporations). In a C corporation, the company itself pays corporate income tax on its earnings, and then shareholders also pay personal income tax on any dividends they receive. In contrast, an S corporation allows income, losses, deductions, and credits to pass through to shareholders, who then report these on their personal tax returns. This means that the income is only taxed once at the individual level, rather than at both the corporate and individual levels.
To form an S corporation, several specific requirements must be met. Firstly, the corporation must be a domestic corporation, meaning it is incorporated in the United States. Additionally, the corporation can only have allowable shareholders, which include individuals, certain trusts, and estates. Importantly, partnerships, corporations, and non-resident alien shareholders are not permitted. The corporation must also have no more than 100 shareholders and can only have one class of stock. Furthermore, the corporation must not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations. Finally, all shareholders must consent to the S corporation election.
In North Carolina, an S corporation must file an annual return with the Department of Revenue. This return must include the name, address, and social security or federal identification number of each shareholder, as well as the income attributable to the state and the income not attributable to the state with respect to each shareholder. The Department of Revenue also allows S corporations to file composite returns and make composite payments of tax on behalf of some or all nonresident shareholders, and may permit the same for resident shareholders.
Overall, forming an S corporation can provide significant tax advantages by allowing income to be taxed only at the individual level. However, it is important to ensure that all the specific requirements are met and that the necessary filings are made with the Department of Revenue to maintain the S corporation status. It is always advisable to check with your accountant to discuss the best options for your business entity.
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The information included here is for informational purposes only, is not exhaustive of all considerations when creating documents, is not intended to be legal advice, and should not be relied upon for that purpose. We strongly recommend you consult with an attorney and do not attempt to create your own documents.