Should I be an S Corporation?

Should I be an S Corporation?

After a corporation has been formed, it may elect “S-Corporation Status” by adopting an appropriate resolution and completing and submitting a form to the Internal Revenue Service (some states require their own version). Once this filing is complete, the corporation is taxed like a partnership or sole proprietorship rather than a corporation. Thus, the income is “passed-through” to the shareholders for purposes of computing tax returns.

Most new small corporations elect S-Corporation Status (90%+) so profits and losses can be added to the shareholders’ personal tax returns without having to pay taxes on profits once, then again when they are given back to the shareholders as income (dividends). This is known as “double taxation” and is the reason why S-Corporations were created. An S-Corporation can also revert back to regular Corporation status fairly easily.

There are some limitations on S-Corporations: they cannot deduct some expenses like health insurance, travel, entertainment, etc. that normal corporations can. Also, they are restricted to 100 shareholders or fewer and those shareholders must be U.S. Citizens. Finally, S-Corporations may not own or be owned by other business entities.

PROS: Prestige of the corporation without the double taxation. Ideal for “1 person corporations”.

CONS: More expensive to setup than a DBA; more paperwork and formality required than an LLC (holding Shareholder/Board meetings, keeping minutes and resolutions).

The Lowdown: Though taxed in a similar manner to LLC’s, still requires the corporate formalities of a regular corporation (holding Board meetings, keeping minutes and resolutions).

How to Get Started

You can form an S-Corporation right now. Complete to contact form below and provide us with your top three choices for the corporation name.

More Information on Forming an S-Corporation

Benefits of the S-Corporation:

  • The main benefit is that profits are not taxed twice as with C-Corporations. This means that if you are the sole shareholder and you earn $100,000/year and pay yourself a reasonable salary of $40,000, the remaining $60,000 is not subject to a) the Corporate Income Tax (currently at 15% up to $50,000 in profits, with rates ranging from 25-39% above $50,000) and b) FICA taxes (Social Security, Medicare and Medicaid taxes that applies to salary). The profits would simply be added to your personal tax return and taxed at your personal rate.

There are some restrictions on S-Corporations that you should consider:

  • S-Corporations cannot deduct certain items that regular “C-Corporations” can like healthcare and travel. Ask your tax advisor for specifics.
  • Are restricted to 100 shareholders or fewer and those shareholders must be U.S. Citizens. Note that a spouses are treated as a single shareholder, as are family members in most cases.
  • Are restricted to one class of stock (e.g. no Class A, Class B or preferred shares, just Common shares).
  • S-Corporations cannot own or be owned by other business entities (corporations, LLC’s, trusts, etc.)