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"S" Corporations
 How Formed? Formed like a "C" corporation, but with a special Form 2553 submitted to the Internal Revenue
Service before the beginning of the tax year or by the 15th day of the third month of the tax year. Form 2553
must be signed by all stockholders (and all spouses who have a community property interest in the stock). "S"
corporations have the following additional qualifications:
 | May not have more than 75 shareholders |
| Shareholders must be individuals, estates, certain tax-exempt organizations, or certain trusts (cannot be a
corporation or partnership), and no non-resident alien may be a shareholder |
| One class of stock (except that voting rights may differ) |
| Cannot be an insurance company, a foreign corporation, or DISC |
Taxation: In most respects, the "S" corporation is treated similarly to a partnership. Here are some exceptions:
| Contribution of property or services for stock is treated the same as "C" corporations. |
| No "special allocations" of gain, loss, deductions, and credits. |
| Corporate debt does not result in an increase in the basis of a shareholder's stock |
| No §754 election |
| Gain is recognized upon distribution of appreciated property from an "S" corporation to its shareholders
(whether or not the corporation is dissolving) |
| "S" corporations that have been "C" corporations with accumulated earnings and profits or "built in gains"
have special rules |
| California minimum franchise tax of $800 applies. For "qualified corporations" the prepaid amount
and the minimum franchise tax is waived during the corporation's first two taxable
years. (See discussion above.)
In addition, there is a California "S"
corporation franchise tax of 1.5% of the corporation's net income. |
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