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S Corp Election In Raleigh, North Carolina

By default, when corporations are formed they become their own tax paying entity, often referred to as a C corporation or C corp. If profitable, the C corp would incur income tax liability at the corporate level and its shareholders would also incur tax liability when they received dividends. This taxation scheme is often referred to as double taxation. Since its creation, the S election for corporations has increasingly become a preferred tax status for many small businesses. This election avoids income tax liability at the corporate level – avoiding double taxation.

Avoid ‘Double Tax’

The main advantage of an S corporation over other types of business entities is that it allows shareholders to receive profits while avoiding corporate-level taxation. Unlike a C corporation shareholder, S corporation owners are only taxed at the individual level.

However, the state has eligibility requirements for businesses to qualify for S corporation status. A corporation must meet the following requirements:

  • Stocks are limited to one class and the number of shareholders is limited to 100 (a married couple qualifies as a single shareholder).
  • Every shareholder must vote in favor of the S corporation tax status (see column K of IRS form 2553).
  • Nonresident aliens are restricted from being shareholders.
  • Shareholders must be individuals and not business entities (certain types of trusts, estates and exempt organizations qualify as shareholders).
  • Certain types of businesses cannot be S corporations. This includes domestic international sales corporations (DISC), insurance companies, banks and thrift institutions.
  • Passive income must not exceed 25% of the company’s gross corporate income.