S-Corporation (S-Corp) An S-Corporation (S-Corp) is a US business entity that combines corporate liability protection with pass-through taxation under IRS Subchapter S. The following is an exhaustive glossary of terms, regulations, and compliance. Core Definitions Term Definition S-Corporation A legal entity electing IRS Subchapter S status (on Form 2553) to pass income, deductions, and credits to shareholders, avoiding double taxation. Pass-Through Taxation A tax system that transfers business income to individual shareholders’ tax returns to exclude federal corporate income tax. Shareholder A person, trust, or estate that owns shares in an S-Corp. Limited to 100 shareholders, all of whom must be U.S. citizens or residents. Form 1120-S The IRS form to file an S-Corp’s income, losses, deductions, and credits. Shareholders get Schedule K-1 to report their share. Reasonable Compensation A mandate that shareholder-employees receive a market-rate salary subject to payroll taxes (FICA), avoiding IRS reclassification risk. Subchapter S Election The formal process of making the S-Corp election by filing Form 2553 with the IRS within 75 days of incorporation. Tax and Compliance Terms Term Definition Schedule K-1 A report issued to shareholders detailing their allocable share of the S-Corp’s income, deductions, and credits for reporting on their personal tax return. Basis Calculation An investor’s interest in the S-Corp used to determine taxable gains or losses on sale or distribution. Built-In Gains Tax A 21% federal tax on S-Corps disposing of assets that appreciated during five years from C-Corp conversion. Accumulated Earnings Tax A penalty tax imposed if the IRS finds an S-Corp earns more than is needed for the business. S-Corp vs. LLC Taxed as S-Corp Element S-Corporation LLC Taxed as S-Corp Legal Structure Issued stock formal corporation. Flexible S-Corp LLC structure using Form 2553. 1099 Reporting No—corporations exempt from 1099-MISC on services. Yes, if the LLC is treated as a disregarded entity and paid $600+ for services. Operational Flexibility Must have corporate formalities (e.g., bylaws, board meetings). Has an LLC agreement, with less procedural requirements. IRS Compliance Requirements 1. Eligibility: Maximum of 100 shareholders; no non-resident alien shareholders. Single class of stock (variations in voting rights permitted). 2. Tax Filing: Form 1120-S filing due March 15; extensions to September 15. Shareholder Schedule K-1s must be sent by March 15. 3. 1099 Rules: Do S-Corps get 1099? Exempt under IRS rules except for an LLC form. Do LLC S-Corps get 1099? Required if payments for services more than $600 and the LLC is not taxed as a corporation. Advantages Disadvantages Prevention of double taxation. More restrictive ownership and operating requirements. Shareholders have limited liability protection. Greater administrative expenses (e.g., filings, payroll). Less self-employment tax on distributions. Penalties for mistakes in calculation of salary or basis.