An S-Corporation, also known as a Small Business Corporation, is a person or a 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 (sometimes referred to as an S Corp) is a special type of corporation created through an IRS tax election. An S-Corporation is an eligible domestic corporation that aims 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). The income of an S-Corp generally is taxes to the shareholders of the corporation rather than to the corporation itself.
Quickly Obtain an EIN for your S-Corporation
It is advised that you obtain an EIN when doing business and filing taxes through a Small Business Corporation. An EIN is used as an identifier throughout the corporate world, so having a Tax ID number would be highly recommended. Before you form an S-Corporation, determine if your business will qualify under the IRS stipulations. Gov Doc Filing makes the process of obtaining an EIN for your S-Corp easier than ever before. Our onlineTax ID services also 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.
Benefits of forming and filing under an S-Corporation
Tax Savings – One of the highlights of forming a Small Business Corporation are the tax savings. While members of an LLC are subject to employment tax on the entire net income of the business, only the wages of the S Corp shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a “distribution,” which is taxed at a lower rate, if at all.
Business Expense Tax Credits – Some expenses that shareholder/employees incur can be written off as business expenses. Nevertheless, if such an employee owns 2% or more shares, then benefits like health and life insurance are deemed taxable income.
Independent Life – An S corp designation also allows a business to have an independent life, separate from its shareholders. If a shareholder leaves the company, or sells his or her shares, the S corp can continue doing business relatively undisturbed. Maintaining the business as a distinct corporate entity defines clear lines between the shareholders and the business that improve the protection of the shareholders.
Disadvantages of an S Corporation
Stricter Operational Processes – As a separate structure, S corps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and records maintenance.
Shareholder Compensation Requirements – A shareholder must receive reasonable compensation. The IRS takes notice of shareholder red flags like low salary/high distribution combinations, and may reclassify your distributions as wages. You could pay a higher employment tax because of an audit with these results.