S Corporations

A. Basic Requirements. A corporation is eligible to elect and maintain S status only if it qualifies as a small business corporation.  For purposes of Subchapter S, a small business corporation:

  1. is a domestic corporation;
  2. has no more than 75 shareholders;
  3. has no shareholders other than:
    1. individuals who are citizens or residents of the United States,
    2. estates, or
    3. certain types of trusts (grantor trusts, voting trusts, testamentary trusts for up to 60 days, and qualified Subchapter S trusts);
  4. has only one class of stock; and
  5. is not an ineligible corporation.

B. Number of Shareholders.

  1. An S corporation must not have more than 75 shareholders.  A husband and wife (and their estates), each owning stock individually, are treated as one shareholder.  If they divorce, they are converted into two shareholders.  If stock is held jointly by nonspouses, each joint owner is counted as a separate shareholder.
    1. The 75-shareholder limit may not be circumvented by forming multiple S corporations.  The IRS has ruled adversely when, solely to avoid the 75-shareholder limit, a large group of individuals formed three separate S corporations (each having fewer than the maximum number of shareholders), which then formed a partnership for the operation of a single business.  For purposes of S eligibility, the three corporations were considered as one; therefore, the shareholder limit was exceeded.

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