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.
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.
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:
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.
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.
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.
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.