What is a common requirement for forming an S corporation?

In the formation of an S corporation, a key requirement is that it can only issue one class of stock. This means that all shares must confer similar rights to the shareholders concerning distributions and liquidation. This provision ensures that the company maintains a simple and consistent ownership structure, which is a fundamental characteristic of S corporations.

This restriction is designed to facilitate the pass-through taxation feature of S corporations, where income and losses are passed through directly to shareholders and reported on their personal tax returns. By limiting the types of stock, it streamlines the process and helps avoid potential complications associated with multiple classes that could differ in rights and benefits.

Other factors such as the number of shareholders and the residency status of shareholders play important roles in corporation formation, but they do not capture the essence of structure related to stock issuance as clearly as the requirement of having only one class of stock.