What is an S Corporation?
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.
Please not a New Mexico LLC can also elect to be taxed as an S-Corp, this is one of many benefits business owners are entitled to.
What is the Difference Between an
S Corp and a C Corporation?
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 though” its members and onto their individual taxes. The S Corp itself does not file a traditional tax return rather an informational return, and its members declare the business’ income and losses as their own.
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.
How is an S Corp Taxed in New Mexico?
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.
Pros & Cons of an S Corporation
Here a few pros and cons of forming an S Corp in New Mexico.
- Limited liability: Protects member’s personal assets from losses and litigation against the company.
- Pass through status: Allows members to declare the company’s profits on their personal income taxes, avoiding double taxation with the corporate income tax.
- Salary benefits: Since owners are also considered to be employees, they can pay themselves with a combination of salary and dividend which may produce favorable tax conditions.
- Tougher scrutiny: The IRS knows that companies try to take advantage of the benefits of filing as an S Corp, and keeps a close eye on all the tax activity within them.
- Limited members: You can only have up to 100 shareholders in an S Corp, which restricts future growth unless you reclassify yourself as a C Corp. You are also limited to only US members.
- Still a corporation: Even though you can elect to be a pass through entity, you are still a corporation and are subject to state corporate regulations.
Who is an S Corp Best for?
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.
Who are S Corporations Best For?
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.
Who should NOT start an S Corporations?
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.
Why would an LLC Elect to be Taxed as an S Corporation?
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.