By default, when you form a corporation, you’re established as a C-corporation. However, you have the option to elect to be an S-corporation.
What is a S-corp? And why would you want to choose an S-corp over C-corp?
A S-corp is a tax classification that provides personal liability protection and passes income through owners. S-corps are not subject to federal income tax and therefore avoid double taxation and help lower self-employment tax.
In this article, we dive deeper into the subject and explain how an S-corp works to help you decide whether it’s right for your business situation.
The biggest difference between an S-corp and a C-corp is the tax benefits. S-corps are considered a flow-through tax entity, much like an LLC, sole proprietorship, or partnership. This means the profits and losses flow through to shareholders’ personal tax returns.
If business owners want to be taxed as an S-corp, the entity must meet these requirements:
As a pass-through entity, S-corps don’t have to file and pay corporate income taxes. Instead, the owners separate the earnings and losses and report them on their personal returns. This allows S-corps to avoid the double taxation that C-corps face.
Due to its tax structure, the earnings of S-corps are taxed when paid out as bonuses (dividends) and salaries. Therefore, larger corporations are subject to saving thousands on taxes.
Filing as a S-corp sounds easy enough, but it’s best to have a qualified person assist you because even the smallest mistake on the paperwork could result in the business being classified as a C-corp.
Additional taxes to make note of are:
As a corporation, you’re subject to several benefits such as personal liability protection and the ability to provide preferred shares. Choosing to file as an S-corp comes with its own set of advantages.
Because of how they are set up, S-corps avoid double taxation. Owners only pay taxes on their personal income tax return. This can result in more profits for the business.
The decision to form a C-corp and S-corp boils down to the profits you plan to make from the business.
As a S-corp, you can lower the tax bill of all shareholders if you plan on taking earnings out of the company as distributions. If your company is up-and-coming and plans to reinvest the earnings into the business, then filing as a C-corp may help lower your tax bill.
There are many reasons to create an S-corporation in Arizona. If you aren’t sure if a S-corp is right for you, consider some of the benefits they have to offer.
Personal liability protection – Creditors cannot take the personal assets of shareholders to pay business debts.
Pass-through taxation – S-corps don’t pay federal taxes at a corporate level.
Credibility – New businesses benefit from having an S-corp name because it increases trust and credibility among employees, customers, and vendors.
Characterization of distributions - A reasonable characterization of distributions as salary or dividends to S-corp employees can reduce self-employment tax liability, while still having the ability to deduct business and wage expenses.
Investment opportunities – S-corps can obtain funding easily because stocks can easily be purchased and sold.
Transfer of ownership – There are no adverse tax consequences of transferring ownership of an S-corp.
Annual tax filing – S-corps are only subject to filing taxes once a year, compared to C-corps which must file quarterly.
While there are many advantages of creating an S-corporation in Arizona, there are downsides. Here are a few disadvantages of Arizona s-corporations.
It’s always best to consult with an experienced professional before deciding how to form your corporation. They can advise you on whether S-corp status is suitable for your unique business situation. The benefits of an S-corp often outweigh the drawbacks, especially for new businesses.
If you are ready to form your Arizona company and have questions or need assistance, complete the contact form or call us at +1 (307) 683-0983. Our team of paralegals is available to provide assistance.