1. S Corp Restrictions
2. S Corp Pros
3. S Corp Cons
4. S Corp Filing Process

When it comes to S corp examples, the most important thing to remember is that an S classification prevents your corporation from being taxed on a business level. An S corp is a corporate entity that functions in the same manner as a C corp, but it is taxed as a partnership. An S corp passes the following to shareholders:

  • Credits
  • Income
  • Deductions
  • Losses

In essence, all business activity flows from the business to individual shareholders, where they file such information on their personal tax returns. Shareholders only pay taxes when they file their tax returns.

For instance, you create a business called Jack Inc. as an S corp in Florida. Bob owns 51 percent of the business, and Deborah owns 49 percent. In 2015, Jack’s net profits amounted to $20 million. Upon filing their personal returns, Bob reported $10.2 million of income, while Deborah reported $9.8 million. The business may choose not to dispense company proceeds and instead invest the money into the business. In such a case, the shareholders would still get taxed on their share of the profits.

S Corp Restrictions

Not all corporations can create an S corp, and you must adhere to certain guidelines from the IRS:

  • Your business must be a domestic corporation
  • You cannot have over 100 shareholders
  • Only a single stock class is allowed (no tiered stock holders)
  • Other entities cannot own an S corp
  • Only U.S. citizens and legal residents can own an S corp

If your business qualifies for an S corp at first, but violates the restrictions later, the business may revert back to C status.

With that, you have a variety of ways in which your business can be charted, and each depends on certain factors:

  • How the business functions
  • Who leads operations
  • How profits are dispensed

S Corp Pros

Moreover, you face various pros and cons when considering an S corp, especially in regards to taxation. On the pro side, you should be aware of the following:

  • Double Taxation: An S corp does not pay business income taxes.
  • Liability Protections: Personal assets in the form of personal bank accounts and houses are safeguarded from creditors and judgments.
  • Simple Accounting Practices: An S corp that does not have inventory may use the cash accounting method, which is easier than accrual accounting.
  • Business Write-Off Expenses: Expenses paid by shareholders can be designated as a business expense.
  • Tax Advantages: S corp shareholders may also classify themselves as employees and get a salary while earning dividends. Additionally, shareholders who also label themselves as employees can save on paying self-employment taxes.

S Corp Cons

Although the pros outweigh the cons, you should be aware of the drawbacks:

  • State Restrictions: Certain states do not recognize S corps.
  • Fees and Rules: Corporations must conduct annual meetings and pay various fees.
  • Shareholder Taxation: Shareholders pay income taxes on the total income of the company, regardless of whether payouts were issued.
  • Salary Mandates: Owners and officers must be paid what the IRS considers a “reasonable” salary, even if that company has yet to earn a sound profit. In addition, a “reasonable” salary means that an individual with skills appropriate for his or her station must be paid according to the job market value.

S Corp Filing Process

When individuals or groups turn a corporation into an S corp, you must determine whether the business would qualify. First, you must register a business as a corporation through the filing of an articles of incorporation document, including other documentation. You would file with the secretary of state office in the state where the corporation conducts a majority of its business.

After, you need to obtain the necessary permits and licenses in the state and county where the business resides. Once your business gets established, you would then submit Form 2553 to the IRS register your corporation as an S corp.

If you recently registered, the business can file for an S classification at any time during a tax year, within 75 days of the incorporation date. Otherwise, the registration should be done by March 15 if you want the S corp to take effect for that year. If you do not file for S corp election by the March deadline, your S corp status will take effect the following year.

You may find a complete set of instructions via the IRS website.

To learn more about S corp examples, submit your legal inquiry to our UpCounsel marketplace. UpCounsel has a pool of top lawyers that will guide you through the S corp filing process and help you determine if an S corp is the right fit for your business. Also, they will help you maximize all tax advantages available to you.