A Subchapter S corporation is a corporation which has elected to be taxed similar to a partnership and has adhered to certain strict requirements to obtain that treatment.
The S corporation still provides for limited liability for the shareholders but avoids the disadvantage of double taxation. The election to be an S corporation must be filed, with the unanimous consent of the shareholders, on or before the fifteenth day of the third month of its taxable year in order for the election to be effective beginning with the year when made.
To qualify for the S election, a corporation must have less than 75 shareholders, all of whom must be non-alien individuals, estates or certain defined trusts. A corporation, partnership, or LLC cannot be a shareholder. Also, an S corporation may not have more than one class of stock, although certain differences in voting rights are permitted. Tax allocations and distributions must be exactly proportionate to ownership interests. With the advent of the LLC, the S corporation entity form is less frequently used.
However, it remains an attractive alternative in some situations and can easily be converted into a C corporation.