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The S Corporation was created in 1958. This was an initiative for investors, giving them access to the corporate form of doing business without incurring two levels of tax. The popularity, however, was not always there. As tax codes changed, so did the interest in them. The S Corporation has gained most of its popularity in 1986, when the rules for C Corporations became less attractive to shareholders. Not every business can qualify for this status, they must first meet the following requirements.



The business must first qualify as a “small business corporation�. This can be further defined as a domestic corporation that has 75 or fewer eligible shareholders, is an eligible corporation and has only one class of stock. The shareholders must meet certain requirements, stocks owned by a husband and wife are treated as one, but once they are separated, than the stock will be counted as two. This plays an important factor in the rule that stocks may never exceed 75 in quantity. The individual must be a US citizen or a legal resident alien, to prevent intentional violations of this, S Corporations can restrict share transfer through buy-sell agreements and first-refusal rights.



The most attractive feature of an S Corporation is that the entity itself is not taxed. Shareholders are the only ones taxed. There are exceptions to this rule, however, the vast majority of the S Corporations never encounter such situations. The S Corporations generally compute net income and gains, as well as losses, as that of partnerships. Most decisions used to determine the amount of income are made at the corporate level rather than by shareholders.



Those shareholders working for an S Corporation, qualify as employees. The corporation can deduct salaries, as well as payroll taxes, paid to and on behalf of these individuals. No self-employment income passes from an S...