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By The Wyoming LLC Attorney Team

Jun 24, 2022
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S Corporations

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Summary

This article discusses S Corporations (S-corps) and their advantages, focusing on their pass-through taxation, limited liability protection, and avoidance of double taxation. It also highlights the differences between S-corps and C Corporations (C-corps) in terms of taxation, formation, and shareholders.

Due to higher corporate taxes, double taxation, and more, the number of businesses electing an S-corporation structure has risen significantly.

As an S-corp, business owners not only avoid taxes on distributions and save on self-employment taxes, but they also receive limited liability protection.

However, with recent changes under the Tax Cuts and Jobs Act, an S-corp business structure may not be best for you.

In this article, we’ll discuss the details of an S-corp, why you should choose an S-corp, and how one works.

What Is an S Corporation?

Within the corporate business structure are both c corps and s corps. Although C corporations are standard, S corporations are often a more attractive option. S-corps were formed by Congress to offer small businesses the best of a C-corp structure and partnership.

S-corps are pass-through entities, which make them like an LLC structure. Unlike C-corps, S-corps are not subject to federal income because all the profits and losses of the business are passed to the shareholders. Electing an S-corp business structure also lowers self-employment taxes by issuing dividends.

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What Is the Difference Between an S-corp and a C Corporation

From taxes and formation to shareholders and fees, there are a few notable differences between an S-corp and a C-corp.

S-corps are given more tax advantages because they’re considered a pass-through tax entity. However, for S-corps to elect this taxation, they must meet these requirements:

  • Have fewer than 100 shareholders
  • All shareholders must be individuals, not corporations
  • May only have only one class of stock
  • Must be owned by U.S. citizens or resident

When it comes to formation, a C-corp can be formed when you’re choosing the right business structure for your unique situation. However, an S-corp can only form if it’s already a C-corp.

How Is an S Corp Taxed?

As previously mentioned, when a corporation elects S-corp taxation, it becomes a pass-through entity. This means the owner pays taxes on the profits and losses of the business on their personal tax return– the S-corp itself does not pay taxes.

The profits of an S-corp are only taxed when paid as dividends or salaries to shareholders. Depending on the type and size of your business, this can save your business a lot of money.

Filing as an S-corp should not be taken lightly. Even if you qualify, there are several minor mistakes you could make that would jeopardize your S-corp business structure. One small mistake can result in being taxed as a C-corp, which could be financially devastating if you are not prepared.

Other S-corp taxes to take into consideration are payroll taxes and annual franchise fees. Payroll taxes vary based on the state, as do the annual franchise fees.

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Why Choose an S Corporation?

Many businesses choose an S-corp structure because it’s publicly traded with shares available for purchase. This ability makes obtaining funding easier and provides more advantages that a C-corp cannot partake in.

In addition to avoiding double taxation that C-corps are subject to, an S-corp tax structure also allows more profits for the corporation. Depending on the type and size of your business, this may be beneficial. For example, a smaller business may not like this structure because of payroll requirements, which are costly.

Advantages of an S Corp

  • Limited liability: Company directors, officers, shareholders, and employees are given personal liability protection through an S-corp.
  • Pass-through tax status: The S-corp does not pay taxes – the owners pay their share of profits and losses on their personal tax returns.
  • Elimination of double taxation: S-corps are not taxed twice, while C-corps are taxed at the corporate and individual levels.
  • Once-a-year tax filing requirement: C-corps file estimated taxes quarterly, but S-corps file annually.
  • Investment opportunities: Because stocks are easily sold and purchased, an S-corp can easily obtain funding.
  • Perpetual Existence: Should any shareholders pass away; the corporation will continue to live on and function as normal.

Disadvantages of an S Corp

  • There may not be more than 100 shareholders involved.
  • Only U.S. citizens and permanent residents may form the shareholders.
  • Formation and ongoing expenses.
  • Closer.
  • IRS scrutiny.

Final Thoughts

If you want to form an S-corp business structure, it’s best to consult with a business lawyer who is familiar with state laws. There are several minor details that should be worked out before electing an S-corp status. A business lawyer can advise on whether this structure is best for your unique situation.

Should you have any questions about structuring your company or need guidance through the process, feel free to reach out to us through our contact form or call +1 (307) 683-0983. Our team of experienced paralegals is available to assist you in navigating through the process.

Once you've established an S-corp and need assistance with taxation and bookkeeping, consider our trusted partner Bench to help. Bench can assist you in organizing your books, maximizing your deductions, and getting your filing done efficiently this year.