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Benefits of an S-Corporation
An S-Corporation
is beneficial for someone starting a company who wishes to protect
their own personal assets and wants to avoid the double taxation of
a regular C-Corporation. The advantage here is that the profits and
losses from an S-Corporation are passed through to the shareholders
to be reported on their individual taxes. C-Corporations are
essentially taxed twice: once for its own profits, and then the
shareholders are taxed for the dividends they receive based on the
shares they own.
For example, the main difference between an S-Corporation and a
regular C-Corporation is that the profits and losses are passed on
to the various shareholders in the corporation. The
shareholders are then taxed on their individual share of the
corporation’s profits or losses and report this on their individual
tax returns.
Requirements of an S-Corporation
All S-Corporations start out as regular C-Corporations. To become an S-Corporation,
the corporation must meet certain requirements and file Form 2553
with the IRS. To qualify as an S-Corporation, the following
requirements must be met:
- Must have less than 100 shareholders
- Shareholders must be U.S. citizens or resident aliens
- Shareholders must be individuals, estates, certain exempt
organizations, and certain types of trusts
- Must have only one class of stock
- Taxes are done according to the calendar year ending on
December 31st unless a special form is filed
If these requirements are met, the shareholders can file Form
2553 to become an S-Corporation. For new corporations, the
deadline is 75 days after conducting business, acquiring assets, or
issuing stock (whichever is earlier) to file Form 2553 and become an
S-Corporation. Existing corporations must file Form 2553 by
March 15 of the year they wish to make the election.
S-Corp or LLC?
S-Corporations operate similarly to regular
C-Corporations, but are taxed in a similar manner to a Limited Liability Company (LLC). Thus, many may
wonder why they should choose an S-Corporation over an LLC since
both offer liability protection for personal assets and both allow
pass through taxation of profits and losses. The tax rate for
S-Corporations and LLCs is going to be different depending on the
state, and is one thing that may help to decide which structure would be most
beneficial. Another factor is corporate maintenance which may
help in deciding which structure would be best. For instance,
many potential business owners may not want to deal with the annual
meetings, minutes of those meetings, and annual reports of an
S-Corporation. Another consideration is how ownership is going
to be divided since S-Corporations are divided equally based on
shares and LLCs can be divided in any way using the operating
agreement.
If a business owner has further questions about whether an S-Corporation would work for their business, they
should consult their attorney or tax professional. MyCorporation can
help save time and hassle with the S-Corporation election process by
making sure IRS Form 2553 is filled out properly. |
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