Updated: Jul 3, 2022
It can be tricky to decide what company structure is best for your small business. With corporate tax rates on the rise, many small business owners are seeking to find ways to save on taxes. Might an S Corporation be an advantage to your business?
Let's take a look at what an S Corporation is:
An S Corporation is a business that elected for S Corporation Status through the IRS. This status allows the taxation of the company to be similar to a sole proprietor or partnership so that they are not paying taxes based on the corporate tax structure.
How does a business qualify to be an S Corporation?
For a business to qualify, they first need to be set up as a corporation by filing documents like the Articles of Incorporation or Certificate of Incorporation to the appropriate government authority, along with paying any applicable fees. Then the business must submit Form 2553 to the IRS electing S Corporation status. The IRS will send a letter back letting the business know whether their election has been accepted and as of what date they are recognized as an S Corporation.
A Few Pros of Being an S Corporation:
Avoid Paying Corporate Tax
Becoming an S Corp has some attractive tax advantages for many businesses. Such as the profits and losses of the business pass through to the corporation owner's personal income tax, which allows you to avoid "double taxation." Like a non-corporate business structure, you avoid paying corporate taxes, but you are still required to file a business tax return every year.
Ability to Write off Business Start-up Losses
Many new start-up businesses will have many expenses and losses in the first few years. However, as an S Corp, these losses can be offset against your personal income, while a regular corporation would not have that advantage.
Offers Liability Protection
A significant advantage of an S Corporation is that it provides owners limited liability protection, which protects an owners' personal assets and shields them from the claims of business creditors, whether the claims arise from contracts or litigation.
A Few Cons of Being an S Corporation:
You Must Pay All Employee-Shareholders a Reasonable Salary
The IRS enforces all S Corporations to pay "reasonable salaries" to all employee-shareholders of the corporation. This is a requirement whether the company is making a profit or not, which can cause financial stress for many new S Corporations.
Limited to One Class of Stock & Number of Shareholders
When you opt to become an S Corporation, you are limited to issuing only one class of stock. Additionally, you can only have up to 100 shareholders who must be either U.S. citizens or U.S. residents.
Required to Hold Meetings & Maintain Minutes
As an S Corporation, you are required to have regular meetings and to maintain company minutes; this can add additional time and stress for a small business owner.
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