What is an S-Corporation Election?
An S-Corp Election is a tax-related filing. Many people think that an S-Corporation is a type of corporation, but really, an S-Corporation is a C-Corporation with an S-Corporation tax election. When the S-Corp tax election is made, the entity is telling the IRS that it would like to be taxed as a partnership rather than as a corporation. This is often done to avoid taxation at the corporate level and then again when distributions are made (at the individual level).
What are the benefits of filing as an S corporation?
At it's core an S corporation is just like any other corporation, providing limited liability protection for it's owners, a formal management structure, added credibility, and a strong foundation for outside investment. One of the unique features of an S corporation lies in the way it's profits and losses are treated by the IRS, and depending on your business can offer tax saving advantages over a typical C corporation.
What kinds of businesses should file as an s corporation?
S corporations are ideal for small business owners who wish to take advantage of corporation perks, while avoiding double taxation. While an S corporation's pass-through taxation is similar to an LLC or sole proprietorship, shareholders are not subject to self employment taxes which can equate to substantial tax savings depending on a number of factors. In most cases, corporations that would benefit from S Corporation status are those who plan on distributing the majority of earnings to its shareholders. Corporations who plan on retaining earnings for future investments in future tax years often choose the C Corporation because under the S Corporation, earnings will be taxed as if they were distributed to shareholders regardless of whether a distribution actually occurred or whether the corporation retained the earnings for future investment.
What are the requirements of filing an S corporation?
If you are considering s corporation tax status for your business, you should first be sure that your business meets the following requirements:
- You must be filed as a U.S corporation, foreign corporations cannot elect S corporation tax status.
- The business must maintain only one class of stock.
- An S corporation is limited to a maximum of 100 shareholders.
- Shareholders in the business must be individuals, estates, or trusts who consent in writing to the S corporation election. Other LLCs cannot be shareholders in an S corporation for example.
- All of the shareholders of the business must have a valid US Social Security Number. The corporate fiscal year must end on December 31st.
How are S corporations and C corporations different?
The difference between an s corporation and a c corporation is the way the profits and losses are taxed by the IRS. While a c corporation is subject to double taxation, that is taxation at both the corporate level and taxation on the distributions made to its shareholders, a corporation that chooses to file as an S corporation passes its profits and losses directly to the shareholders. This pass-through taxation is similar to the way an LLC is taxed, with the main difference being that while the owner of an LLC is often subject to self employment taxes, a shareholder is not. This can lead to potential tax benefits in many cases, but can also be a disadvantage depending on the needs of the business.
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