Which corporate form can provide Subchapter S tax status upon meeting certain requirements?

Subchapter S tax status allows qualifying corporations to pass income, losses, deductions, and credits through to their shareholders for federal tax purposes, thereby avoiding the double taxation typically associated with C corporations. To qualify for Subchapter S status, a corporation must meet specific criteria laid out by the Internal Revenue Code.

Closely-held corporations are small businesses owned by a limited number of shareholders, and they are eligible to make an election to be taxed as an S corporation if they adhere to specific requirements. These include having no more than 100 shareholders, all of whom must be individuals, estates, or certain types of trusts, and being domestic entities. This closely-held aspect aligns well with the conditions necessary for S corporation status.

Professional corporations, while they can sometimes elect to be taxed as S corporations, generally do not have the same flexibility as closely-held corporations in terms of shareholder limitations and the nature of their ownership. Publicly traded companies typically exceed the 100 shareholder limit and therefore cannot elect S status. Limited liability companies (LLCs) also have their own tax classifications and while they can choose to be taxed as S corporations, they do not inherently receive Subchapter S status without an election.

Thus, closely-held corporations are distinctly suitable for Subchapter S tax