An S-corp is a type of business entity that is formed under the Subchapter S of the U.S. Internal Revenue Code (IRC). Unlike LLCs, which are typically taxed as partnerships, an S-corp offers special tax benefits and can be taxed either as a regular corporation or a pass-through entity.
Since any profits earned by the S-corp are passed to the shareholders, taxes are paid at the individual level rather than at the corporate level. This means that income from an S-corp is treated differently from personal income when it comes to taxation. As such, it may offer more tax advantages than other types of business entities, such as LLCs or sole proprietorships.
Additionally, because of its status as a legal business entity, an S-Corp also provides limited liability protection for its owners and shareholders.
Why choose an S-corporation?
There are several benefits of forming an S-corporation:
- Avoid double taxation: S-corporations are pass-through entities, meaning they do not pay federal income tax on their profits. Instead, profits and losses are passed through to shareholders and taxed at their individual tax rates.
- Limited liability protection: Shareholders of an S-corp are typically not personally liable for the company's debts and other liabilities.
- Tax savings: S-corporation shareholders may be able to save money on self-employment taxes since they can take a portion of their earnings as distributions rather than salary.
- Credibility: Forming an S-corp can help build credibility with customers and vendors, as it suggests the company is well-organized and professional.
- Perpetual existence: S-corporations can exist in perpetuity, meaning they can continue to operate even after shareholders pass away or leave the company.
- Transferable ownership: Ownership in an S-corp is transferable, making it easier to sell or transfer ownership to others.
It's important to note that forming an S-corporation involves certain requirements and restrictions, such as a limit on the number of shareholders and restrictions on types of stock. It's always recommended to consult with an attorney or tax professional to determine if an S-corp is the best option for your business.
How to form an S-corp
To form an S-corporation (S-corp), follow these steps:
- Choose a unique name for your corporation and check its availability in your state.
- File Articles of Incorporation with your state's Secretary of State.
- Obtain any necessary business licenses and permits.
- Elect S-Corp status by filing Form 2553 with the IRS within 75 days of incorporation.
- Develop bylaws for your corporation and hold an organizational meeting with your board of directors.
- Issue stock certificates to all shareholders.
- Obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS).
- Create a shareholder agreement that outlines voting rights, dividends, and other important details.
It is highly recommended to consult with an attorney or accountant to ensure you are accurately completing specific requirements for your state and the IRS.