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Choose a Business Entity
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Step 4:
Consider the S corporation
Created by the Tax Reform Act of 1986, S corporations are in many ways the best of all possible worlds. S corporations are taxed like individuals, yet shareholders benefit from the same liability protection as regular corporate shareholders. However, an S corporation must meet a strict set of criteria, including:
A maximum of 75 shareholders
Shareholders must be citizens or residents of the U.S.
Only one class of stock (regular corporations can offer different classes of stock with varying prices and dividends)
No more than 25 percent of the gross corporate income from passive income (in other words, they must create products and services, not simply produce investment income)
The S corporation is an excellent option if your company qualifies, but the strict rules can limit flexibility, especially for fast-growing companies that have the potential to become quite large. In addition, S corporations take on all the bookkeeping burdens of a regular corporation.
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