Can a professional corporation be an s corp?

Answer 1

Yes, businesses that would normally be designated as Professional Corporations and taxed at a flat 35%, can choose to file a 2553 form (sub-S election) and become a pass-through entity for tax purposes.

A Licensed Professional choosing to operate his/her business as a corporation, would do so as a "Professional Corporation". All Stockholders of a Professional Corporation must be licensed in the field of operations; Only Doctors can be the owners of a Professional Corporation in the Medical field, only real estate Professionals can be stockholders in a Real Estate Corporation, etc. The Industry may also have verbiage requirements in the Articles of Incorporation, specifically limiting the scope of business, or formally declaring certain liabilities.

All of this is still available if the corporation additionally elects S-corp Status.

ELIGIBILITY For a corporation to be eligible for S corporation status, the following conditions must be met and maintained:

• The business must have become a corporation prior to filing for S corporation status. See "Incorporation" for more information on this process.
• The business must also have no more than 75 stockholders. Until the Small Business Job Protection Act of 1996 was passed, corporations with more than 35 shareholders were disqualified, but now the limit is 75, allowing most small businesses to fall within the guidelines.
• All of the business's stock must be owned by individuals who reside in or are citizens of the United States. Estates or trusts may be allowed as stockholders, but corporate or foreign investors are not allowed. This includes other businesses that are not corporations, such as partnerships or sole proprietorships. This provision, therefore, excludes corporate subsidiaries from claiming S corporation status.
• The business must issue only one class of stock. This means that with the purchase of stock must come the same economic rights, such as receiving dividends or compensation in the event of liquidation at the same time and in the same amount per share as all other shareholders. Voting rights may differ amongst the shareholders without being considered a sign of the possession of different classes of stock.

INELIGIBLE BUSINESSES Those businesses that are ineligible for S corporation status include:

• All financial institutions, such as banks and savings and loans
• Insurance companies
• Businesses that receive 95 percent or more of their gross income from exports (also known as DISCs, Domestic International Sales Corporations)
• Corporations that use the possessions tax credit
• C Corporations that have been S corporations within the last five years