By The Wyoming LLC Attorney TeamSep 01, 2022
This article explains the concept of an S Corporation in New Mexico. It outlines the benefits of S Corps, such as limited liability and pass-through taxation, and the key differences between S Corps and C Corporations. The article also discusses how S Corps are taxed in New Mexico, both as pass-through entities and as corporations, highlighting the franchise tax.
An S Corp is a corporate business structure that allows its members to protect their personal assets while owning and profiting in the company. This limited liability structure shields its members from lawsuits, liabilities, and losses the business may suffer.
It is also a corporate structure that allows its members to elect to be taxed as a pass-through entity, which means the business itself is not taxed rather its members “pass-through” the company’s income and declare it on their personal taxes. To obtain this status you must file IRS Form 2553. S Corps are taxed under Section S of the tax code.
Though both an S Corp and a C Corp are corporate business structures, S Corps can elect to be treated as pass-through entities which means that their revenue “passes through” its members and onto their individual taxes. The S Corp doesn't submit a standard tax return; instead, it files an informational return, with its members reporting the company's income and losses on their individual tax filings.
A C Corp, on the other hand, does file its own tax return claiming its profits, and its members only file their personal salary and dividends. This makes a C Corp subject to double taxation while the S Corp avoids this.
If the S Corp elects to be considered a pass-through business, it will not be taxed and therefore does not have to pay corporate income taxes. Instead, the members are taxed on the business’ income and dividends they show on their personal returns. If the S Corps is structured this way then the members will pay the payroll and franchise taxes. However, in the state of New Mexico, all pass-through entities are required to file a return to pay state income taxes.
If the S Corp elects to be taxed as a corporation, they are subject to all corporate taxes like income tax, payroll tax, and franchise tax when applicable. In New Mexico, the franchise tax is a flat $50 fee.
Here are a few pros and cons of forming an S Corp in New Mexico:
You may choose to classify your business as an S Corp for a number of reasons. As always, please consult with a professional before filing.
To be an S Corp you must meet certain requirements, like capping your shareholders at 100, and you can only have one type of stock. Because of this, S Corps tend to be smaller companies and only US members.
Any large corporation that wishes to grow beyond 100 shareholders or diversify the type of stock they offer will not benefit from being an S Corp. Furthermore, only US citizens can be members of the S Corps, so if you would like to include international shareholders, you would have to switch to a C Corp status.
Lastly, S Corps are more closely watched by the IRS than C Corps. Because S Corps enjoy tax deductions and benefits that C Corps do not, they are more likely to be taken advantage of. If you don’t think your company can hold up to this scrutiny, it’s probably best to elect C Corps status.
Before choosing any tax structure, you should always consult with an expert CPA since each business has different needs. That said, an S Corp offers many tax benefits that an LLC can take advantage of.
The main draw of filing as an S Corp is the status of the members. In an LLC or partnership, the members are considered owners for tax purposes, not employees. In an S Corp, the members are still considered owners, but they are also considered employees, and therefore able to draw a salary paid by their company. This could offer tax advantages as there are different deductions available for payroll and salary costs that would not be available for a traditional LLC.
If you're prepared to establish your New Mexico business and need guidance contact us. You can reach us via our contact form or by calling +1 (307) 683-0983. Our team of skilled paralegals is here to help you navigate the process.