The S-corporation is a special format designed to eliminate the problem of double taxation that

one might find with a C-corporation format. It first differs from a C-corporation in that it is

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limited to a hundred shareholders, although it can be created with just one shareholder. If a

shareholder is an employee of the business and contributes any service to the business, then the

corporation is required to pay that individual a salary. The term that is used is “reasonable”

salary. This definition may vary under several conditions. A failure to comply with this

ambiguous definition of “reasonable” salary means that the IRS can reclassify the profits as

wages and tax the amount at the personal income rate.

Corporations that issue stock must comply with several steps to meet both federal and state

statutes, including the following: outlines to issue stock to shareholders, determining the price

and number of shares to be issued, creating stock certificates; developing a record to record all

stock transactions; and meeting all federal and state securities requirements. [6]Smaller

businesses may choose to issue stock only to those who were involved in the initial investment of

the business. In such cases, one generally does not have to register these securities with state or

federal agencies. However, one may be required to fill out all the forms.


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