Sub-Chapter S Agreement

Many small-business owners find S corporation more appealing than a standard C corporation because of the tax benefits and the limited liability protection it provides as a corporation.

With S corporation, income and losses are passed through to shareholders and included in their incomes tax returns, in effect making only one level of federal tax to pay.

Like corporations, the setting up of an S corporation follows the same requirements. S corporation must also file articles of incorporation, hold of director and shareholders’ meeting, keep corporate minutes and have shareholders vote on the major decisions.

The stocks of an S corporation are transferable, meaning a shareholder may sell his interest in the corporation without obtaining the approval of other shareholders.

To be taxed as a corporation, shareholders of an S corporation must agree to a subchapter S election.

To qualify for a subchapter S election, owners of S corporation must meet certain conditions. First, it must have no more than 75 shareholders who may be individuals, estates, certain partnerships, certain trusts, some tax-exempt charitable organizations and other S corporations.

A corporation must make the subchapter S election no later than two months and 15 days after the first day of the taxable year to elect, which requires the consent of all shareholders.

An S corporation may revoke its subchapter S status by either failing to meet the conditions for eligibility for an S corporation, or by filing with the Internal Revenue Service (IRS) no later than two months and 15 days after the first day of the taxable year. As soon as the revocation becomes effective, the business will be taxed as a corporation.

Our corporate and business lawyers can enlighten you on corporate and business issues such as subchapter S agreements and S corporation, as well as represent clients in corporate and business litigation.