Advantage of S Corp: Everything You Need to Know
The main advantage of S corp models is significant benefits for those who utilize pass-through taxation as well as corporate governance. 3 min read
Advantage of S Corp
The main advantage of S corp models is significant benefits for those who utilize pass-through taxation as well as corporate governance. For many business owners deciding what kind of business legal entity to create, it is worth exploring and understanding what an S corporation is and if it might be the right model.
There are two types of corporate business models, specifically "C" or "S" corporations. S corporations have significant differences with C corporations on the accounting, taxation, and governance aspects.
As a company owner, you will need to decide which model is right for your business. This is an important decision that can affect your business' actions far down the line.
Even beyond C or S corporations, there are also many other business models that may be right for you, particularly if you are a sole proprietor. For example, LLCs and partnerships may also be right under certain circumstances.
One of the biggest differentiators between the different business models is how the business' income is taxed. S corporations do not pay taxes themselves, but rather pass through their taxes to the owners like how a partnership or LLC operates. The owners then, like in a LLC or partnership, account for the corporate income on their individual tax forms.
A S corporation will therefore avoid the double-tax that affects C corporations. In a C corporation, the business itself pays tax on its profits and then its owners also pay tax on any dividends they are given.
S corporations therefore may have a major tax advantage over C corporations, but they can also create accounting and tax complexities as well. Both S corporations and C corporations nonetheless are similar in structure, as both will have a corporate board, C-level officers, and stockholders.
Both S corporations and C corporations protect their stockholders from liability for the company's acts and debts, like in a LLC and unlike in certain forms of partnership.
The personal liability protection means that a stockholder's assets remain protected from being used to satisfy the corporation's debts, except in extraordinary circumstances.
Combined with the pass-on of the company’s profits and losses to shareholders and avoiding double taxation, S corporations offer a variety of benefits and features.
The main tax benefit is that S corporations, like LLCs and partnerships, will not tax the business' income twice, at both the corporate and individual level.
Who Can Qualify to Be an S Corporation?
A S corporation has many benefits, but not every business is permitted to become a S corporation. The federal government requires the following criteria for S corporations:
• S corporation stockholders can only be American citizens or residents here on a permanent basis.
• S corporation stockholders cannot include partnerships and LLCs.
• S corporations are required to have 100 or fewer stockholders.
It is also important to remember that you need to register your S corporation with the IRS within 75 days after formation. This is a relatively short timeline, and you will need to submit IRS forms in addition to your company's original formation.
If you are transforming your current company into a S corporation, you must do so at least 75 days after the beginning of the year. For example, for 2018 the date would be March 15th to file in time to switch your business to a S corp.
Even if you decide you want to become a S corp, it is important to follow these steps and make sure your company qualifies.
S corporations are a very beneficial business model for many companies for tax, liability, and governance reasons. For example, S corporations are useful particularly when you want to sell the business or shut it down.
Many other business models, such as general partnerships, are difficult to dissolve or transfer.
S corporations also offer a special tax benefit to stockholders who also work for the company as an employee.
S corporations are beneficial for tax reasons but also are beneficial for how they limit liability for owners and provide various accounting differences as well.
If you need help with creating your S corporation, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.