The main advantage of S-type enterprises is that there is no federal income tax on profits. All profits of an enterprise are distributed to shareholders as private taxes according to the percentage of all shares owned by shareholders. Even if the enterprise does not pay dividends, the shareholders of the S-type enterprise still have to pay taxes on the profits of this enterprise. Of course, if the S-type enterprise later declares a dividend, if the shareholders have paid taxes on their profits, the dividend will no longer be taxed.
S-type enterprises have the following requirements:
1. Requirements for shareholders
S-type enterprises have certain requirements for shareholders. First, the total number of shareholders should be less than 75. Second, the shareholders of S-type enterprises cannot be other enterprises, joint-stock companies or foundations. There may be exceptions to this rule. Some foundations can own S-type enterprises, and charitable foundations can also use S-type enterprises as shareholders of S-type enterprises. Finally, the debt of S-type enterprises should be handled carefully. If the IRS thinks that these debts are just another stock of S-type enterprises, the IRS will revoke a company's passport.
2. Equity classification
S-type enterprises can only have one type of stock. However, in this kind of stock, there can be two kinds of stocks with voting rights and without voting rights. But the difference between these two stocks can only be the difference in voting rights. If an S-type enterprise has two types of shares: common stock and preferred stock, it cannot pass the inspection of the IRS. The bonds of S-type enterprises cannot have the nature of stocks, otherwise the IRS will revoke the legal status of S-type enterprises.
3. Business forms and income patterns
There was a time when S-type enterprises had limited income. The IRS does not allow S-type enterprises to earn more than 25% of their annual income through dividends, rent, options, interest and stock withdrawal. S enterprises must make money. However, the recently passed tax law removed all these restrictions. Of course, there are exceptions to this rule. If the S-type enterprise was originally a C-type enterprise, or the C-type enterprise merged with this S-type enterprise, the classification of the S-type enterprise will be automatically cancelled.
4. Ownership of subsidiaries
Before 1997, S-type enterprises were not allowed to own shares of other types of enterprises, or only allowed to own a certain proportion. However, due to 1997, class S enterprises can own 0/00% shares of other class C enterprises. Moreover, S-type enterprises can also have other types of S-type enterprises. However, IRS still restricts certain industries, and some types of enterprises, such as banks, are not allowed to set up S-type enterprises.
If a new company decides to become an S-type enterprise, it must apply to the IRS. All shareholders must sign the application form. The new company must apply within the fifteenth day of the third month of the fiscal year, or within the fifteenth day of the third month after its establishment. Once approved, the S-type enterprise will remain an S-type enterprise until the shareholders decide to transform or no longer meet the organizational requirements of the S-type enterprise. For example, if there are more than 75 shareholders, it will no longer be an S-type enterprise. Once an enterprise loses its status as an S-type enterprise, it will take five years to reapply.