S-Corporation

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  • You’ll be able to protect your shareholders assets with confidence
  • Enjoy the advantages of avoiding taxation at the corporate level
  • Have the flexibility to easily transfer shareholders ownership as needed

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What is an S-Corporation?

An S-Corporation is a common entity type for businesses because incorporating your business allows for more protection of assets, and can avoid double taxation on the personal and corporate level.

IRS Definitions of an S-Corp: A corporation is a person or group of people who establish a legal entity by filing articles of incorporation with the state’s secretary of state granting it certain legal powers, rights, privileges, and liabilities. An S corporation is an eligible domestic corporation that wants to avoid double taxation (once to the shareholders and again to the corporation) by electing this status using Form 2553 (Election by a Small Business Corporation).

Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. An S corporation is not a sole proprietor or partnership.

There are requirements for establishing an S-Corp, or electing to be taxed as an S-corp, including being a domestic company, and having less than 100 shareholders.

 

 

Requirements & Taxation of an S-Corporation

S-Corporations is taxed by the federal government with “Pass Through Taxation”, like LLCs, Sole Proprietorships, and Partnerships, but NOT like Corporations or C-Corporations. This means that the federal tax on profits and losses of the S-Corp are passed to the shareholders’ of the S-corps personal IRS tax returns.  This is a key difference between S-Corps versus a general corporation.

The biggest benefit of S-corp taxation, unlike Sole Proprietorships and partnerships, there is no self-employment tax on the shares of the business profits. But, there are additional tax requirements of S-Corporations:

  • Each owner who works as an employee of the business is required to be paid a salary, and the salary is subject to taxes (Medicare, Social Security, and Unemployment). These taxes are paid half by the corporation itself, and half by the employee/owner.
  • State Taxation: Every state has their own rules of taxation for an S corp.

Corporations must meet certain criteria to form an S-Corp and file form 2553. LLCs must also meet these requirements when electing to be an LLC taxed as an S-Corp

  • It must be a domestic company (not foreign)
  • It must have no more than 100 shareholders/members
  • The shareholders can be individuals, estates, or tax-exempt organization (non-profit organizations), and CANNOT be Corporations or Partnerships.
  • Shareholders cannot be nonresident aliens of the United States of America.
  • There can be only 1 class of stock
  • A Bank or Insurance company are not allowed to form S-Corporations
  • All shareholders must content to form an S-Corp

S-Corporations file Form 1120-S for their annual federal income tax return to the IRS, whereas regular corporations file Form 1120. Like Partnerships, S-Corporations use forms Schedule K and K-1 to report income, deductions, and allocation of assets among the members.

Also like partnerships, members of an S-Corp are taxed on their share of the income, whether or not the income of the business was actually distributed to the individual.

S-Corporations vs Corporations

There are 2 main differences between them:

  1. S-Corps can “pass through” taxation, and avoid “double taxation” once at the corporation level and once at the shareholder level.
  2. S-Corps cannot have more than 100 shareholders

For these 2 reasons, S-Corporations are a popular entity choice for small businesses that want to avoid the double taxation and will not exceed having 100 shareholders of the company.

Potential Disadvantages of forming an S-Corporation:

An important distribution between corporations versus LLCs, Partnerships, or Sole Proprietorships, is that if you work for your business, you must become an employee of the business. Therefore, there are additional taxes to pay on the waged earned as an employee of the business:

  • Unemployment Tax – You must register as an employer with your state and pay unemployment insurance tax which varies by state)
  • Taxes on having employees: Form 940, 941, W-2

An additional restriction on S-Corporations, and C-Corporation, is that there are limits on the amount a member can contribute to a personal or business retirement plan: the IRS rule as of 2016 is either the less of $53,000 or 25% of a members’ compensations/salary in that tax year.

Quickly Obtain an EIN for your S-Corporation

When getting a tax id number from the IRS, there is a distinct entity selection for S-Corporations, and all over corporations. To get an EIN/Tax ID Number for an S-Corporation, simply click the link below and submit the EIN Application.Our online services expedite the process of the forming of an S-Corporation, putting the time and manpower back in your hands. We handle the lengthy paperwork and filing, ensuring 100% accuracy and efficiency, while you are left to concentrate on building your small business.

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Select Entity Type

The first step is to choose which entity classification is right for your business. If you are unsure, take the easy survey and find out which one if best for you!

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Get Tax ID Number

The second step is to submit an application for a Tax ID number from the IRS. You will receive your Tax ID online, quickly and easily.

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Form your Business

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