One of the most important decisions that a new business owner makes is to decide the legal structure of his business. There are a variety of business structures for a business owner to choose from. Those who want to incorporate their businesses in the form of an S-corporation should be aware of the requirements concerning the stock for this type of business structure.
What is an S-Corporation
An S-corporation is a special type of corporation that is based on the same business structure as a regular corporation, or C-corporation. Both types of business structures have a board of directors, officers and annual meetings, however, unlike like a C-corporation, an S-corporation is not treated as a legally separate entity, but instead passes the income it generates through to its owners in proportion to their share in the company.
The number of shares that a company needs to have in order to form an S-corporation is essentially determined by the owners of the business. An S-corporation owner can choose to have as little as 10,000 shares of stock, or as many as a million shares of stock. The amount of shares that an owner ultimately decides on will be delineated in the company's Articles of Incorporation, laws which are submitted to the Department of Labor of the state the business is registered in.
While an S-corporation can choose the amount of stock shares that it issues, there are restrictions on what type of stock the company can issue, as well as the type of shareholders it can have and how many. Unlike a C-corporation which can issue different grades of stock like preferred and common, an S-corporation can only issue regular common stock and may only have a maximum of 100 shareholders. Likewise, only U.S. citizens and resident aliens can be shareholders of S-corporation stock.
In order to form an S-corporation, a business must first legally incorporate itself into a C-corporation. After a company becomes legally registered as an C-corporation, the business can then submit federal Form 2533 to the IRS to begin the procedure of transitioning to an S-corporation. State forms, filing fees and an official annual meeting, including minutes, need to be completed before a business can be legally recognized as an S-corporation.