The S corporation is a subchapter of the regular, or C, corporation business structure. Running this type of corporation is similar to a regular corporation, except taxation on profits is different and avoids double taxation. However, S corporations have rules they must abide by to maintain their status, which provides other benefits such as limited liability protection for owners.
Size
To maintain S corporation status, companies operating under this business structure have to stay under a certain size. S corporations are limited to 100 shareholders and the shareholders must be U.S. citizens or residents. Regular corporations, in contrast, can have an unlimited number of shareholders who can be foreign investors as well.
Stocks
S corporations can go public and sell stocks to raise capital for business activities and expansion. Stocks are securities investors buy that give them partial ownership of corporations. The IRS limits S corporations to selling one class of stocks, in comparison to regular corporations that have the ability to sell multiple classes of stocks.
Business Operations
S corporations have several rules regarding business operations they must follow to maintain their status. S corporations must be domestic, which means owned and operated in the United States. S corporations cannot deduct the costs of health insurance and other fringe benefits they provide to shareholders or employees who own more than 2 percent of the company. According to Nolo, S corporations must divide profit and losses in proportion to the shareholders' interest in the business.
Corporate Formalities
S corporations must also observe several formalities to maintain their corporate status, which are similar to the formalities regular corporations must follow. These formalities include holding annual meetings with shareholders and the board of directors, and recording the minutes of these meetings. Companies should also hold special meetings to discuss and vote on company decisions and electing officials. Both regular corporations and S corporations must maintain a three-tier management structure that includes a board of directors, corporate officers and voting stockholders.
