1. An Example Of S Corporation Taxation
2. Eligibility Criteria for an S Corporation
3. The Benefits Of An S Corporation
4. The Downsides Of An S Corporation

What are some S corporation business examples?  An S corporation (a.k.a. S Corp) is an Internal Revenue Service tax classification.

This means the subchapter S taxation election has been made to treat the company as a pass-through entity for tax purposes. A common S corporation business example that does this is a high paying consultant.

The tax structure of an S corporation is like a partnership where the income or loses go to the individual shareholder's tax return rather than getting taxed at both a corporate and individual level. This can be an advantage for those who are self-employed and earn a lot more than their peers.

An Example Of S Corporation Taxation

To help you understand how S corporation taxes work, let's look at Bens, Inc.

Formed as an S corporation in Florida, there are two shareholders. Gemma owns 60% of the corporation, and Sam 40%.

In 2016, the company had a net profit of $10 million. Therefore, when Gemma and Sam are filing their personal tax returns, Gemma will report $6 million in income, and Sam $4 million.

Note: The corporation might choose to not distribute the income to the owners, rather investing it back into the business. As an S corporation, Gemma and Ben will still be taxed on their profits whether it is distributed or not.

Eligibility Criteria for an S Corporation

Not all corporations can form an S corporation. In order to elect the S corporation status with the IRS, the following must be in place:

  • The company must be a domestic corporation.
  • There's a maximum of 100 shareholders.
  • The corporation can issue only one form of stock.

If these are not met, then you risk being treated as another type of corporation when taxes are due. The same goes if anything changes over time in regards to the business structure, an S corporation can have its eligibility taken away

The Benefits Of An S Corporation

There are a number of benefits we have touched on already for choosing to incorporate as an S corporation. The following are five of the biggest S corporation benefits:

  1. Income is only taxed once. As an S corporation doesn't pay any taxes, the only tax is at a personal level when profits and losses are paid to shareholders.
  2. When an individual becomes a shareholder of an S corporation, their personal assets are protected. They are separated from business assets meaning business liabilities cannot affect personal assets.
  3. With a limit of 100 shareholders, S corporations have a family-friendly feel. That doesn't mean the business cannot grow exponentially.
  4. If an S corporation has no inventory, they can use simple accounting methods. The cash method can be used which is not as difficult as the accrual method.
  5. As shareholders are eligible to be paid as regular company employees, there are some benefits of business expense write-offs. Always consult with a tax/accounting professional in these situations, but health and other types of insurance are popular business expenses written off by S corporations.

The Downsides Of An S Corporation

If you're considering forming an S corporation, you need to know the downsides as well.

  1. S corporations aren't recognized in all states.
  2. You still need to pay fees and follow certain rules as an S corporation. This means filing documents like Articles of Incorporation and minutes at state and federal level. There is also the requirement to hold regular shareholder meetings.
  3. While the no double taxation is great, shareholders of a C corporation are only required to pay taxes on income they receive from the business. S corporation shareholders must pay taxes on the company income, whether that was distributed to shareholders or reinvested back into the business.
  4. All shareholders of an S corporation must receive the same class of stock.
  5. When an S corporation is formed, all owners and officers must be paid a "reasonable" salary according to the IRS. Even if the company is not profitable, and isn't expected to be right away, a "reasonable" salary is an amount that an individual with the skills used can be expected to be paid on the open job market for a similar position.

If you need help with finding other examples of S corporations, 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.