What Makes a Corporation Eligible for S Corporation Status?
S status is not automatic. The corporation and its shareholders must satisfy continuing eligibility rules.
Eligible corporation
The corporation must meet the statutory definition of an eligible domestic corporation and avoid prohibited categories.
Eligible shareholders
Shareholder eligibility is limited under current law, so certain entities and nonresident owners can prevent or terminate S status.
One class of stock
The corporation generally must have only one class of stock for economic-rights purposes, although voting differences can be permitted.
Election and termination
A valid election requires the applicable shareholder consent and timing rules, and later eligibility failures can terminate the election.
The takeaway
Check the corporation, shareholder types, stock structure, and election requirements before doing any S corporation tax calculation.
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FAQ
Can every corporation elect S status?
No.
Can stock voting rights differ?
Potentially, without necessarily creating a second economic class.
Can later eligibility failures terminate S status?
Yes.