How Does an S Corporation Work?

S corporation

How many directors do I need to form an S Corporation?

Most states only require one director, but you are allowed to have more than one listed. Some states use the number of shareholders in the S Corporation to determine the minimum number of directors. 

What is the organizational structure of an S Corporation?

The hierarchy of an S Corporation includes three groups: the shareholders, directors and officers. 

  • Owners of the S corporation are considered to be the shareholders; who are responsible for electing and removing directors, approving or disapproving major business decisions.
  • The board of directors are responsible for managing the S corporation. They are responsible for making major business decisions and are in charge of hiring, firing and managing officers, who make the day-to-day business decisions.
  • Officers are responsible for the day to day operations of the company. 

* It is very common for S Corporations to only have one shareholder who also serves as the only director and officer. 

What are authorized shares of stock?

At the time of incorporation, S Corporations must state the number of shares of stock they wish to issue. The total number of authorized shares is the number of shares to be issued to the shareholders. Shares of stock are certificates of ownership in the S Corporation and each shareholder is issued certificates based their ownership value of the S Corporation. 

What is a share’s par value?

The par value of a share of stock is its minimum stated value. Common par values range from $0.01, $1.00 or no par. Par value typically does not equal the actual value of a share, this is normally determined by the price that someone is actually willing to pay or it is based on the book value of the company. 

How is a S Corporation taxed?

As a pass-through entity, S Corporations do not pay corporate tax on company profits. The profits or losses are instead passed and reported on to the shareholders' individual tax return. Any taxes due are paid at the shareholders individual tax rate. However, S Corporations are still required to file an informational tax return known as the 1120S.