A corporation formed under state law is by default taxable as a “C” corporation for U.S. federal tax purposes. However, a corporate entity that qualifies as a domestic eligible entity may elect to be taxed as an “S” corporation for federal tax purposes.

A domestic eligible entity generally includes a domestic corporation or domestic limited liability company (LLC). An entity makes an S corporation election using Form 2553 (Election by Small Business Corporation).

For an entity to qualify as an S corporation under IRC Section 1361, the entity must meet the following requirements:

  1. The corporation does not have more than 100 shareholders,
  2. The corporation does not have any shareholders that are not individuals or permitted trusts or estates under Section 1361(C)(2),
  3. The corporation does not have any nonresident alien shareholders, and
  4. The corporation does not have more than one class of stock. 

If the entity violates any of the restrictions under IRC Section 1361, it cannot elect to be taxable as an S corporation. 

If the S corporation election is approved, the entity must file an annual Form 1120-S (US Income Tax Return for an S Corporation) and provide a Schedule K-1 (Form 1120S) to each shareholder. 

More information about S corporations and related tax returns can be found on the IRS website.