The profits of an S-Corporation automatically pass to the shareholders of the corporation each year. This means that any income earned by the corporation is automatically passed to its owners and included as taxable income for the shareholders. Most owners of corporations choose to file for S-Corp staus to avoid the possibility of double taxation. An S-Corp must have fewer than 75 shareholders to qualify as an S-Corporation.
Most small business owners naturally will avoid double taxation by paying out income in the form of salary and bonuses. Both salary and bonuses, and any other form of employee compensation, are direct reductions from the net income of the corporation, hence taxing the owner only once, at the individual level.
The fear of many owners of corporations is that of double taxation. When the owner of a C-Corporation receives a dividend distribution, that income will be taxed twice – once at the corporate level, and a second time as a dividend distribution. This is what is referred to as double taxation.
Once you have established your corporation according to your state requirements, to convert from a C-Corporation to an S-Corporation, you must meet the same requirements as a newly formed corporation electing S-Corporation status. You must meet the requirements of a “small business corporation” which are, in general: