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If you live in the United States, you may wish to consider the advantages of structuring your business as an S corporation (also known as sub-chapter or sub-S). This structure permits a small business corporation to treat its net income as though it were a partnership. One objective is to overcome the double-tax feature of taxing corporate income and shareholder dividends. Another purpose is to give the shareholders the benefit of offsetting business losses incurred by the corporation against their income.

Only closely held corporations, that is those with 35 or fewer shareholders, may make the S election. All shareholders must consent to the S election, and only one class of outstanding stock is allowed. A specific portion of the corporation’s income must be derived from active business rather than passive investments. No limit is placed on the size of the corporation’s income and assets.

If you make an S election now, at some future point you may wish to revert to a full corporation for tax advantage reasons. This is permitted, but the corporation may not be able to re-elect the S vehicle for several years once the S election is reversed. This is to prevent small corporations from changing frequently to maximize tax advantages. Since S forms of incorporation are not recognized in all states, you should obtain further information from your professional advisers.