S-Corp

S-Corp

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S-Corp


Double Taxation

An s-corp is among the options of entities you can form when creating a business. S-corps are the most similar to a c-corp but on a smaller scale. S-corporations provide companies with investment opportunities, protection via limited liability, and perpetual existence. They are different from c-corporations, however, in that they do not have to deal with double taxation and only file taxes annually. There is also a limit to how many shareholders the company may have. The S-Election takes place at the federal level with the IRS. At the state level, every Wyoming Corporation is formed the same way. This is done by filing Articles of Incorporation with the Secretary of State. This holds true for C-Corps, S-Corps, Non-Profits and Close Corps.

Advantages of S-corporations


There are numerous advantages associated with an s-corp, all of which help encourage companies to select this structure. To start, s-corporations have limited liability protection for employees, directors, shareholders, and officers.

S-corporations also take advantage of taxation of a pass-through nature. This means that owners of the company will report profits and losses, but just as their own personal shares, when filing their own personal income taxes. This point has the added benefit of avoiding double taxation. Some other structures would have double taxation, meaning income would be taxed first in the form of corporate income, then as personal dividend income. By contrast, s-corps only have the second type of taxation.

To supplement those tax benefits, s-corporations only need to file their taxes once per year. By contrast, a c-corporation must file taxes every quarter.

S-corporations also offer investment opportunities. Specifically, the corporation can bring in investors by selling stock shares.

Finally, s-corps have perpetual existence. This means that even in cases when the owner of the business dies or leaves, the business will still continue without any complications. Read more here about Wyoming Corporation benefits.

Disadvantages of S-corporations


Unsurprisingly, there are also disadvantages associated with s-corporations. Otherwise, everyone would opt for this structure. To start, you can only form an s-corporation if you are a citizen or permanent resident of the United States. By contrast, limited liability companies and c-corporations do not require legal residence for their formation.

There is also relatively limited ownership for an s-corporation as it can only have up to 100 shareholders.

Compared to other entities, s-corps have strong obligations for tax qualifications. Making a mistake with a filing requirement may even lead to termination of your status as an s-corp, even if the mistake was accidental.

On a related note, the IRS tends to scrutinize s-corporations more closely. This is because payments for both shareholders and employees can be distributed via dividends or salaries, with each method having its own taxation.

Finally, s-corps can have high expenses, both at the formation and the ongoing costs. The fees will, of course, vary by state, but many do charge ongoing fees, including those for franchise taxes or annual reports.

Forming an S-corporation


The process of forming an s-corporation actually begins with a c-corporation. That is because all corporations start as c-corps. After you have formed your c-corp, you can file to change your status to an s-corp. This also requires meeting certain requirements:

  • Ownership by someone with U.S. residency or citizenship.
  • Having less than 100 shareholders.
  • All shareholders must be individuals instead of corporations.
  • Having a single stock class.

To form your s-corporation, begin by selecting your legal name. Some states allow you to reserve the name, but not every state does. From there, file the Articles of Incorporation and give your initial shareholders stock certificates. Next, you will need to get your business license as well as any industry-specific certificates. You then apply for an EIN and any other required ID numbers. Before 75 days have passed since forming the corporation, you must file form 2553 with the IRS.

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