LYCOS RETRIEVER 
S Corporation: Shareholders
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S Corporation shareholders pay Medicare and Social Security tax only on money received as wages or salary, but not on profits received as dividends or that stay within the company. Under certain conditions, LLC members may need to pay Social Security and Medicare taxes on the entire amount of LLC profits. In particular, LLC's that provide professional services such as health, law or engineering should consult a tax advisor on this issue.
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S Corporation status can be relinquished voluntarily via the filing of the appropriate statement of termination. This type of revocation of status may only be made with the approval and consent of the majority shareholders. The complete process, and all necessary supporting information requirements, can be found in the IRS Regulations section 1.1362-6(a)(3) and in Instructions for IRS Form 1120S, U.S. Income Tax Return for an S Corporation.
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RECORDKEEPING AND ATTENTION TO DETAIL Because an S corporation is still a corporation, it requires owners to pay careful attention to the details of recordkeeping. In some cases, businesses that did file for S corporation status have not been viewed as such by the courts because they failed to act like corporations. In other words, some small businesses simply apply for the status in hopes of gaining limited liability protection, but they fail to keep separate personal and corporate accounts, for example, or to hold regular director's and shareholders' meetings and take minutes, all of which are requirements for corporations. They may ... neglect to change their name to reflect their new corporate status in an effort to avoid the extra cost of ordering new stationary and business cards and changing their sign. As a result, the owners of such companies have been known to be found personally liable just as if their business was a sole proprietorship or partnership.
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S corporation status can be terminated either voluntarily or involuntarily. A corporation's S corporation status is involuntarily terminated if any event occurs that would prohibit the corporation from making the election in the first place (a "disqualifying event"). Examples of a disqualifying event would include having more than 75 shareholders, a shareholder that is other than an individual, estate, or trust, or a shareholder who is a non-resident alien. Generally, the election is automatically terminated as of the date on which the disqualifying event occurs. However, if a corporation has both accumulated earnings and profits as well as passive investment income that exceeds 25 percent of the corporation's gross receipts for three consecutive years, the corporation'S corporation election will be terminated beginning with the following tax year.
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An S corporation is a pass through entity for tax purposes. It does not file a tax return for the purpose of paying taxes, but does file information returns. All profits and losses are passed through to the shareholders. In turn, each shareholder reports the profit or loss on his or her individual tax returns in proportion to their ownership interest. For instance, if you own 30% of the total issued shares, 30% of the profits or losses must be reported on your personal tax returns. S corporations must have a fiscal year-end of December 31.
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As mentioned above, electing S corporation status with the IRS allows for pass-through taxation of the corporation’s profits. S corporations must still file corporate tax returns, but they do not pay taxes at the corporate level. The corporation’s profits are passed-through to the individual tax returns of the shareholders, and taxes are paid on those profits at the individual tax rate. If the corporation is reporting a loss, the loss is passed-through to the shareholders as well. Because S corporations do not pay taxes at the corporate level, this eliminates the potential double tax C corporations face when profits are issued as dividends to shareholders.
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