“S” Corporations

Subchapter “S” corporations, like LLCs, are pass through entities for taxation purposes; that is, profits and losses pass directly to each shareholder and are not held at the entity level.  Corporate governance of an “S” corporation is the same as for a “C” corporation – you’re basic corporate formality such as regular board and shareholder meetings apply for “S” corporations.  You get subchapter “S” status for your corporation by filing a Form 2553 with the IRS after you form the corporation with your relevant state.  It’s a very simple process. 

There are some fairly significant limitations that make “S” corporations suboptimal for most business beyond very closely held companies with very few shareholders.  You cannot have more than 100 shareholders in an “S” corporation, and none of the shareholders can be institutions (such as investment funds).  You also cannot have more than one class of stock, which is also a significant drawback for fundraising purposes.  Thus, unless you are sure that your company will not need to raise funds and will be only owned by a few people, an “S” corporation is probably not the route to go (particularly given the LLC option).

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