Small Business Reading Room

S Corporations - Their History and Challenges

S-corporations were created in 1958. They were developed to enhance entrepreneurial activity and to eliminate the negative effects of double taxation experienced by taxable corporations (C-corporations).(7) C-corporations are subject to double taxation because the corporation itself is liable for income tax on its earnings, then when dividends are distributed to the shareholders the shareholders must pay income tax on those dividends. To receive favorable tax treatment, entities electing S status must adhere to many restrictions, including:

• the number of shareholders,


• type of shareholder,


• class of stock, and;


• domesticity requirements for S-corporation elections.

In the half century since the creation of S-Corporations, the U.S economy and the world's economies have changed. With the advent of technology, globalization of the economy has become more of a reality.

Policymakers considering changes to tax policy must take a broader view that includes tax policies around the world. To ensure America's entrepreneurs remain competitive, in a global marketplace, we must adopt tax policies that remove barriers to their success.

S-Corporations are a large segment of the U.S. economy. To ensure their continued success H.R. 4421, the "S Corporation Reform Act of 2005," (pdf) was introduced by Congressmen Clay Shaw and Jim Ramstad.

The legislation is intended to reform the provisions that control S-Corporations so that S-Corporations can reach their full potential. H.R. 4421 contains provisions that are advocated and supported by the American Institute of Certified Public Accountants and others.

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