e form of business organization desired, without the necessity of taking into account major differences in tax consequences."1 An S corporation is a creation of the Internal Revenue Code and has no legal standing as such. The first requirement is that a corporation be formed under the laws of some state. Bravenec says that "Subchapter S applies only to a 'small business corporation' that files a proposed election under [IRC] Section 1372."2 Any corporation which does not qualify as an S corporation or which loses that qualification is taxed as a C corporation. Qualification as an S corporation for federal income tax purposes qualifies a corporation for similar tax treatment at the state level in all but seven states. One state, Louisiana, does not recognize S corporations (LA. Rev. Stat. Ann. Section 47: 287.732) and some others, including California, impose small income taxes on the corporate entity. In California, income of S corporations is subject to an annual 2.5 percent tax at the corporate level under Cal. Rev. and Tax Code Section 23802. Separate elections must be filed in most states. For federal income tax purposes, the Subchapter S election must be filed under IRC Section 1362 (a) on or before the 15th day of the third month of the corporation's current taxable year or, if it is newly formed, the earliest of the dates the corporation has shareholders, starts in business or acquires assets. All shareholders must consent to the election.
To qualify as a S corporation, the following requirements must be met:
1. The corporation must not have more than 35 shareholders.
2. All shareholders must be individual persons (and not an estate or trust). An ESOP, Employee Stock Ownership Plan, is not available to an S corporation because the stock in an ESOP is owned by a trust. Bravenec says that, "although an S corporation cannot have a partnership as a shareholder, it may be a partner in a partnership."3
3....