If you are thinking of becoming a business owner and forming a company, before making a final decision, you should consider all the options you have. Read on to find out why an S corporation status might be the right move for your business.
What Is an S Corporation?
S corporation is considered a business structure with a special S (sub-chapter S of chapter 1 of Revenue Code) status. They are separated from the shareholders, and their taxes are very close to partnerships taxes.
An S corp is a business entity that that meets the specific Internal Revenue Code requirements that give the corporation the right to be taxed as a partnership if it has 100 shareholders or less. It is very unlikely that an S corporation has more than 100 shareholders, so most of them get to enjoy taxation benefits and don’t pay income taxes. The organization’s return or losses are divided among the members and it’s up to the shareholders to report the gains or losses on their tax returns.
Benefits of S Corporations
The status of S corporation gives the members similar benefits as in a partnership. The reason why S corps are better than a partnership is the fact it provides the owners with partial liability protection from creditors. As we mentioned, in a partnership, the returns, losses, and tax credits of an S corporation go to shareholders yearly even if there weren’t made any distributions. This is the reason why the return is taxed at the investor level, not the corporate level. Compensation is given out tax-free if the previous earning were taxed. Also, it is good to know that some corporate penalties don’t apply to S corp status. Lastly, S status doesn’t have to be a permanent decision. If you aren’t satisfied with your decision, you could switch your company to regular or C status, at any time.
How Can a Corporation Become an S Corporation?
If you want to turn your corporation into an S corp, your company must meet certain requirements. Firstly, it must be eligible, and it can have only one kind of stock. Also, as we mentioned before, it mustn’t have more than 100 shareholders. If your spouse or a family member is an investor, you are thought of as a single shareholder. All members must be U.S residents.
If you can meet all the requirements, you may file (along with all shareholders) the required form and get taxed under the subchapter S, chapter one of Revenue Code. The form must be signed by all of the corporation’s investors. The S status only affects the income tax of the company; it doesn’t have an impact on the Federal Insurance Contributions Act and employment taxes.
If you think this is too much work for your company or it just sounds too complicated, you can get professional assistance from a number of experts that provide incorporating services. They are a lot cheaper than hiring legal representatives and they are specialized in setting up LLCS, S corporation and C corporation status. Don’t let anything from keeping you fulfilling your dream and open a company today!