Benefits of a S Corporation: Everything You Need to Know
The biggest benefits of a S corporation are pass-through taxation and general savings on self-employment taxes. 3 min read
2. S Corp Requirements
3. Special Tax Considerations
The biggest benefits of a S corporation are pass-through taxation and general savings on self-employment taxes. Pass-through taxation occurs when losses and profits flow from the business to shareholders, where they file such information on their individual tax returns.
An S corp is not a legal business entity, but simply a tax designation. Corporate registration usually starts your business as a C corp. You may then apply for a special S tax classification from the IRS.
The S corp process begins when you register your corporate entity via the secretary of state office in your respective state. An S corp is structured in the same manner as a C corp, with such roles as:
Further, all roles within the S corp function in the same manner a C corp, and owners must issue stock. An S corp structure makes the most sense depending on your goals and financial situation. You should conduct some research and talk with a CPA or attorney to find out if an S corp is the best choice for your business.
S Corp Benefits
S corps provide a wide array of benefits. For example, you may transfer shares without tax ramifications or posing the risk of dissolving the business entirely if you transfer over 50 percent of the shares. Such advantages are not available under general partnerships or general partnerships. In fact, LLCs and partnerships would be dissolved if an interest amounting to over 50 percent was transferred to another party.
An S corp is also not required to adjust property basis or adhere to complex accounting mandates upon ownership transfers.
- Note: Corporations normally use the accrual accounting method, unless they are designated as a smaller corporation. A small corporations is one that possesses gross receipts of $5 million or less. S corps do not have to use the accrual method, unless inventory is involved.
S corps are also a great fit for businesses in the following areas:
- Businesses that offer services (ex. Consultants)
- Businesses that do not require heavy start-up capital
- Businesses that do not need to purchase heavy equipment before starting operations
- Businesses that do not need large expenses or extensive effort to operate.
S corps also enhance your credibility with the public. Customers, potential employees, and vendors tend to look upon S corps with more credibility because it shows that the owners have made a firm commitment to the business.
In addition, the shareholders possess the same liability protections as C corps. For instance, a shareholder’s personal assets in the form of cars and houses cannot be obtained via judgments and creditor petitions. Partnerships or sole proprietors operate in the same form of S corps, with losses and income sources passing to shareholders. Unlike a standard corporation, however, S corps do not face double taxation at the business level. Instead, S corp shareholders only pay taxes upon fling their personal tax returns.
S Corp Requirements
It’s worth noting that not all corporations would qualify for an S corp status for the following reasons:
- S corp shareholders must be permanent residents or U.S. citizens.
- S corps may not have over 100 shareholders.
If you qualify, you must register for an S corp within 75 days from the date of your incorporation date to create your S corp registration via Form 2553. You would then submit the form to the IRS for consideration. If you possess an established business and wish to choose an S corp, you need to register within 75 days from when the tax year begins. For instance, existing businesses need to register by March 15, 2016 to be considered for the year 2016.
Special Tax Considerations
An added benefit comes in the form of tax income characterizations. S corp shareholders may also be designated as salaried employees, in addition to accepting dividends and other tax-free distributions. Additionally, a shareholder employee can save on unemployment taxes by becoming an employee. With that, shareholder employees must be paid a reasonable salary according to the duties being performed and the typical salary range outside of the business.
To learn more about the benefits of a S corporation, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s lawyers will provide more information on the advantages of establishing an S corp tax structure for your business. In addition, they will help you determine if an S corp is the right move for you, or if another solution would be better suited for your business goals.