There are certain requirements for an American corporation to qualify as an S corporation. First, the business must be a closed corporation with 75 or fewer shareholders. All the shareholders must be US citizens or resident aliens. Only individuals, estates, certain trusts, and, under certain circumstances, corporations can be shareholders in an S corporation. An S corporation only issues on class of stocks.

The advantages:

  • One advantage of forming an S corporation is that when the corporation has losses, the shareholders can use these losses to offset other income, so their taxes will be lower.
  • Secondly, under the S Corporation tax election the business is only taxed once. This is an important benefit if the corporation wants to retain a greater portion of its income for future growth.

The disadvantages:

  • The disadvantages of an S corporation are that there are specific requirements that need to be met in order to qualify as an S corporation. It must be a domestic corporation, and there is a cap as to how many shareholders the corporation may have.
  • Foreign investors are not able to become shareholders in the S corporations. This is disadvantageous since globalization has become an important trend in the world of business.

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