When starting, buying or inheriting a business; there are seemingly an endless number of important matters to which a business owner must attend. Among a business owner’s chief concerns is how to appropriately classify or formally register a business. One option that’s attractive for a number of reasons is to incorporate a business.

A business with a corporate designation is viewed in the eyes of the law as a separate entity. Therefore, the corporation’s owners assume a “limited amount of legal liability for the corporation’s business activities and debts.” Corporations are bound by many legal, regulatory and tax rules and regulations. It’s important therefore, that business owners consult with an attorney prior to making decisions regarding incorporation.

In the case a business owner decides incorporating a business makes sense, the decision of whether to file for subchapter S status must be made. Upon formation and barring any additional action being taken, all corporations are designated as subchapter C corporate entities. However, to avoid double taxation, some corporations apply for subchapter S status. It’s important to note, however, that not all corporations are eligible to apply for subchapter S status.

Subchapter S status is only awarded in cases where a corporation meets the following criteria:

• Incorporated and headquartered in the U.S.
• Independent
• Shareholder number capped at 35
• Shareholders are all U.S. citizens
• Shareholders own “one class of stock”

Corporations that are granted subchapter S status avoid the double taxation imposed on C status corporations. Additionally, shareholders are protected against losses stemming from possible corporate debts.

Source: FindLaw.com, “Tax Differences Between C and S Corporations,” 2014