S Corporations

The S corporation was created through federal tax laws. It is allowed to operate like any other regular corporation except that the IRS allows it to be taxed like a partnership (a pas through entity).When you incorporate as a business, you are automatically a ā€œCā€ corporation unless you specify that you want to be an ā€œSā€ corporation.The difference in the two is that if you operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any IRS corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.
In Kentucky, the law extends this favorable tax treatment to state corporate income tax liability and S corporations will not be subject to the corporate income tax in most instances. However, if your S corporation has large capital gains, you may be subject to the corporate income tax rate described above. Basically, in order for the gain to be taxable, the qualified capital gain must be larger than $25,000 and must be larger than 50 percent of the corporation's taxable income.
Then, you must file a special IRS form electing to be taxed similarly to a partnership. This election preserves the corporation's limited liability under state law but avoids taxation at the corporate level. This means that income and losses of the S corporation are passed through to shareholders in much the same manner as a partnership passes through such items to partners.
One important difference between partnerships and S corporations is that in the S corporation all profits, losses, and other items that pass through must be allocated according to each shareholder's proportionate shares of stock; so, if you own 50 percent of the stock, you must receive 50 percent of the losses, profits, credits, etc. This is not the case with a partnership or an LLC, where one partner or member can receive different percentages (or changing percentages over time) of different tax items if the operating agreement so specifies.
S corporation requirements. Although the tax laws don't limit S corporation status to small corporations in terms of revenue, the requirements for electing can make it difficult to operate a large business as an S corporation. To obtain S corporation status under the federal income tax law, all of the following requirements must be met:

The corporation must be a domestic corporation (a corporation organized under the laws of the United States, a state, or territory that is taxed as a corporation under local law).
All shareholders must agree to the election.
The corporation may not have more than one class of stock (voting and nonvoting shares are not considered to be two separate classes, however.
The corporation may not have more than 75 shareholders.
The corporation may not have any shareholder that is a nonresident alien or nonhuman entity (such as other corporations or partnerships), unless the shareholder is an estate or trust that is authorized to be an S corporation shareholder under the tax laws. Certain exempt organizations, such as qualified pension, profit-sharing, and stock bonus plans, or charitable organizations will be allowed to be shareholders in an S corporation (for purposes of determining the number of shareholders of an S corporation, a qualified tax-exempt shareholder counts as one shareholder).
Prior to 1997, an S corporation could not have subsidiaries, and could not be a member of an affiliated group of corporations. As of 1997, an S corporation can hold qualifying wholly owned subsidiaries and can own 80 percent or more of the stock of a C corporation. The C corporation subsidiary can elect to join in the filing of a consolidated return with its affiliated C corporations, but the S corporation cannot join in the election.

An S corporation is a creature of the federal tax laws. For all other purposes, it's treated as a regular corporation. So, to form an S corporation you first have to incorporate under state law.
Then, you must file a special IRS form electing to be taxed similarly to a partnership. This election preserves the corporation's limited liability under state law but avoids taxation at the corporate level. This means that income and losses of the S corporation are passed through to shareholders in much the same manner as a partnership passes through such items to partners.
One important difference between partnerships and S corporations is that in the S corporation all profits, losses, and other items that pass through must be allocated according to each shareholder's proportionate shares of stock; so, if you own 50 percent of the stock, you must receive 50 percent of the losses, profits, credits, etc. This is not the case with a partnership or an LLC, where one partner or member can receive different percentages (or changing percentages over time) of different tax items if the operating agreement so specifies.
Although the tax laws don't limit S corporation status to small corporations in terms of revenue, the requirements for electing can make it difficult to operate a large business as an S corporation. To obtain S corporation status under the federal income tax law, all of the following requirements must be met:

The corporation must be a domestic corporation (a corporation organized under the laws of the United States, a state, or territory that is taxed as a corporation under local law).
All shareholders must agree to the election.
The corporation may not have more than one class of stock (voting and nonvoting shares are not considered to be two separate classes. The corporation may not have more than 75 shareholders.
The corporation may not have any shareholder that is a nonresident alien or nonhuman entity (such as other corporations or partnerships), unless the shareholder is an estate or trust that is authorized to be an S corporation shareholder under the tax laws. Certain exempt organizations, such as qualified pension, profit-sharing, and stock bonus plans, or charitable organizations will be allowed to be shareholders in an S corporation (for purposes of determining the number of shareholders of an S corporation, a qualified tax-exempt shareholder counts as one shareholder).
Prior to 1997, an S corporation could not have subsidiaries, and could not be a member of an affiliated group of corporations. As of 1997, an S corporation can hold qualifying wholly owned subsidiaries and can own 80 percent or more of the stock of a C corporation. The C corporation subsidiary can elect to join in the filing of a consolidated return with its affiliated C corporations, but the S corporation cannot join in the election.