What is an "S corporation"?
An "S corporation" is essentially a tax status. Every corporation when it's filed is classified as a "C corporation" and in order to make your corporation an "S corporation" you have to file a form with the IRS, I believe it's Form 2553, and then your corporation is essentially taxed like a partnership. So, whereas a "C corporation" incurs tax at the corporate level on profits that it makes, and then a second tax to the individual shareholders when profits are distributed to them, an "S corporation" is taxed only once, and that's as the profits flow straight through to each individual shareholder, and they're taxed individually at their personal income tax level. Now, in order to qualify for an "S corporation", the "C corporation" that you form has to meet certain minimum requirements. Typically there's a few qualifications that you have to meet: number one, you have to have fewer than one hundred shareholders, each of the shareholders has to be a US citizen, and generally it would have to be a natural person, with some very few limited exceptions. There has to be a fiscal year end date, in other words a tax reporting date, of December 31st, and you aren't allowed to have any preferred stock. And that means that if you would like to have someone come in and make passive investments, you wouldn't be allowed to give them different rights than everyone else had, which can be very limiting when you're raising money.Last, but not least, if you want to have "S corp" status or treatment in a current fiscal year, the year that you start the corporation you typically have to file your IRS Form 2553, which is the "S corp" election, within 9 days of starting the company, or else you have to wait until the next fiscal year in order to get that treatment.
