What determines whether a corporation will be classified as an S corporation or C corporation?

The classification of a corporation as an S corporation or a C corporation is primarily determined by the election made by the corporation to be taxed under Subchapter S of the Internal Revenue Code. An S corporation is a special type of corporation that meets specific requirements set forth by the IRS and has elected to be taxed under these rules. This designation allows the corporation to avoid double taxation by passing income, losses, deductions, and credits through to the shareholders for federal tax purposes.

In order to qualify for S corporation status, the corporation must meet various criteria, including having a limited number of shareholders (no more than 100), being a domestic corporation, having only allowable shareholders (individuals, certain trusts, and estates), and having only one class of stock. The decision to elect S corporation status is made formally by filing Form 2553 with the IRS, reflecting the choice of the corporation to be taxed under Subchapter S.

The other factors mentioned, such as the number of shareholders, type of business activities, and state of incorporation, can influence eligibility and operational aspects, but they do not determine the designation as S or C corporation outright. The key deciding factor is the specific election made to take advantage of S corporation tax treatment.