NJ S Corp Tax: Everything You Need to Know
A NJ S Corp tax refers to a type of business structure that is an individual entity, separate from its owners and is taxed under Subchapter S through the IRS.3 min read
2. S Corporation Advantages
3. S Corporation Disadvantages
A NJ S Corp tax refers to a type of business structure that is an individual entity, separate from its owners and is taxed under Subchapter S through the Internal Revenue Code. S Corporations offer small business owners large tax savings and decreased liability.
Electing S Corporation Status
An S Corporation is a type of U.S. corporate structure where the company's profits are passed through its shareholders for federal tax purposes. Stockholders report the profit and losses on their personal tax returns and are taxed based on their individual income. This process helps to avoid taxing the same income twice, also known as double taxation. Simply put, the biggest benefit of filing under this entity is tax savings.
The corporation must meet specific Internal Revenue Code requirements. The company must be formed in the United States, with all of its owners and shareholders holding U.S. citizen status or are legal residents of the United States. The company must consist of 100 or fewer shareholders and issue one class of stock. S Corporations can be owned by estates, individuals, single member LLC, and particular trusts and tax-free organizations. The majority of Limited Liability Companies, Partnerships, and Corporations are not eligible to become an S Corporation.
To register a business as a New Jersey S Corporation, specific procedures must be followed.
- Fill out and submit Form CBT-2553.
- The company's owners and shareholders all must agree to this election and meet the requirements of the State.
The company will receive an answer within one month of submitting Form CBT-2553. Once an S Corporation is formed, the company will remain a New Jersey S Corporation as long as it is a Federal S Corporation. A corporation can withdrawal their request by submitting a letter of revocation with signatures from all of the company's stockholders.
S Corporation Advantages
An S Corporation offers many advantages, including major tax breaks, an independent business structure, and limited liability insurance.
- Liability Protection
- Owners are not responsible for the company's debts or losses and are protected from the business's funds, assets, and other investments. In order to limit the chances of bankruptcy, the corporation's finances and records are kept separate from the finances and records of the stockholders.
- Tax Breaks
- The corporation can elect to pass income, losses, deductions, and credits through to their shareholders for federal tax purposes. S Corporations are exempt from corporate tax, which helps to eliminate double taxation. The owner can claim the company's debts on their personal income tax return, which appeals to startup businesses in need of capital. Return on investment earnings are also exempt from self-employment tax.
- Independent Business Structure
- Ownership rights are easily divided based on the shareholder's investment. Changes in ownership are simple and do not disrupt normal business operations. This allows for the company to have an unlimited lifespan.
- Yearly legal meetings help to improve management styles, as well as communication between the company's owners.
S Corporation Disadvantages
- S Corporations are a flow-through entity, which has its advantages but also plays a negative role. Executives must pay taxes on all business income, even if the income wasn't issued to the owners. In addition, payroll tax returns must be filed quarterly, creating additional costs for the company.
- An S Corporation is not as flexible as a Limited Liability Company because, in an S Corporation, profits and losses are distributed based on the owner's investment. The company's debts are excluded from the shareholder's investments, limiting the amount of loss that can be claimed. Minority shareholders may suffer loss of their investment due to restrictions on buyback agreements or the sale of stock stated in the company's guidelines.
- S Corporations have more initial and ongoing costs and stricter requirements than other entities. These requirements include:
- Conducting yearly reports
- There must be a board of directors
- Executive meetings are required to record minutes
- Constant monitoring and business filing adds to cost.
- Also, shareholder benefits can be costly. Life insurance, housing costs, health insurance, and other benefits are considered taxable income for employees.
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