S Corporations Advantages: Everything You Need to Know
S corporations advantages include tax savings and greater flexibility than standard C corporations. You must ask yourself if an S corp is the right choice for your business goals, especially if you are starting a business.3 min read
S corporations advantages include tax savings and greater flexibility than standard C corporations. You must ask yourself if an S corp is the right choice for your business goals, especially if you are starting a business. If you have a general partnership or sole proprietorship, you may turn your current entity into a corporate structure with an S corp classification.
An S corp is one of the most popular choices when it comes to business incorporation. Other options include the following:
• C corps
An S corp is considered a special tax designation from the IRS for businesses who request it. The S classification merely refers to the code section of the IRS. An S corp is not a legal entity, but simply a tax classification. When launching your business, you need to create your business structure through an LLC or corporation. After, you can apply for S corp treatment from the IRS. The S corp is considered a pass-through tax entity that allows business owners to reduce their tax burdens.
As a corporation, an S corp is made through the creation of an articles of incorporation document via the secretary of state office in your particular state. Also, an S corp functions in the same way as a C corp. For instance, S corps dispense stock and function in the same manner as any other corporation. An S corp also comprises the following:
The shareholders are also the owners and are given the same protections as owners of a C corp. This means that an S corp structure does not allow creditors to seize personal assets to satisfy business liabilities or debts. An S corp passes a majority of its income and losses to the shareholders to file on their individual tax returns.
Unlike a C corp, the business is not subject to business income taxes. In essence, S corps can bypass the double taxation associated with C corps. Double taxation occurs when the business itself must pay business income taxes, and individual shareholders must pay personal taxes as well. Under an S corp, shareholders only have to pay personal taxes, and they do not pay business income taxes.
Many people differ on which structure is best, and the best choice depends on your business goals. You should also consult with an attorney or accountant to know which structure suits your business needs the best. Small business owners tend to favor an S corp structure because of its single-tax benefits.
S Corp Restrictions
S corps provide excellent benefits, but not every company would qualify. The IRS has several restrictions:
• S corp shareholders must be permanent residents or U.S. citizens
• Other entities cannot own an S corp, such as an LLC or another corporation
• S corps cannot have over 100 shareholders
• S corps are only permitted one stock class (no tiered stock allowed, but voting rights differences are allowed)
If your business qualifies, you must also be aware of the IRS deadline. If you create a new business, you must register for an S corp within 75 days after your create the entity to get the designation. To register for an S corp, you must submit Form 2553 to the IRS. If have a long-existing entity, you have to register within 75 days of the beginning of the next tax year. For instance, an existing business needed to register by March 15, 2017 to be considered for S corp status in 2018.
S Corp Advantages
Although S corps come with certain drawbacks, they come with more advantages than disadvantages. For instance, owners can transfer shares freely with minimal restrictions or tax consequences. Other advantages include the following:
• **Income Characterizations: Under an S corp structure, shareholders who engage in other duties for the company can also classify themselves as employees, take a salary, and accept dividends at the same time. Classifying yourself as an employee reduces self-employment taxation, but you must give yourself a reasonable salary to avoid a negative response from the IRS. The IRS does not want to see an artificially low salary so you can reduce your self-employment tax balance.
• **Increased Credibility: Getting an S corp enhances your reputation among customers, business partners, and employees. An S corp classification shows a greater commitment to your business operations.
• **Easier Accounting Method: While corporations must adhere to the accrual accounting method, a much more stringent method, S corps are not beholden to such standards, unless they have inventory.
For more information on S corporations advantages, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s lawyers will give you greater insight into the advantages of an S corp election, including the necessary maintenance procedures you need to be aware of. Also, they will help you maximize tax savings so you can place additional funds into expanding your business.