Home
>
Small Business
>
S Corporation ? What Is It?

S Corporation ? What Is It?

For many small businesses, the "S" corporation is the business entity of choice. The "S" in S corporation refers to a tax designation. All corporations are created the same way under state law. A small business must then chose a tax status, to wit, "C", "S" or non-profit. Important issues concerning S corporations are covered in this article.

C Corporation v. S Corporation

Federal tax laws automatically consider every corporation to be a "C" designation. A small business, however, may elect to be designated as an "S" corporation by filing IRS form 2553. The election must be made prior to the tax year in which it is going to be effective. All shareholders must sign the election.

A C corporation stands alone for tax purposes. It must file tax returns and pay taxes on profits. Profits and losses are reported on the corporate tax return and do not pass through to shareholders. C corporations can elect any calendar month as the end of their fiscal year.

An S corporation is a pass through entity for tax purposes. It does not file a tax return for the purpose of paying taxes, but does file information returns. All profits and losses are passed through to the shareholders. In turn, each shareholder reports the profit or loss on his or her individual tax returns in proportion to their ownership interest. For instance, if you own 30% of the total issued shares, 30% of the profits or losses must be reported on your personal tax returns. S corporations must have a fiscal year-end of December 31. If you intend to eventually take your business public, you cannot use an S corporation.

Although S corporations are a tax choice, there are limitations on what corporate entities can make the election. The biggest hurdles are:

1. There can be no more than 75 shareholders;

2. Each shareholder must be a person, not a business entity; and

3. There can be only one class of stock.

Benefits

While S corporations provide relief from the tax filings of a C corporation, there are negative aspects to using them. Simply put, a C corporation can write off more expenses. S corporations may not be able to deduct certain types of insurance and costs of doing business. The list is fairly complicated, so you should speak with a tax professional prior to deciding which designation works for your business.

S Corporation vs. Limited Liability Company

S corporations have a definite tax advantage over limited liability companies ["LLC"]. Distributions from LLCs to shareholders are subject to self-employment tax [15.2 percent] in their entirety. Distributions from S corporations, however, can be broken down into two categories, salaries and dividends. The dividend distributions are not subject to the self-employment tax. Avoiding self-employment tax can make a substantial difference in the amount of money you take home.

In Closing

I always laugh when someone emphatically says that every business should be formed as a particular entity. Such statements are simply wrong. The "best" business entity depends entirely on the nature of your business. In many instances, S corporations are ideal.

Richard Chapo, Esq., is a business lawyer with http://www.sandiegobusinesslawfirm.com - offering legal advice to San Diego businesses. This article is for general education purposes and does not address every facet of the subject matter. Nothing in this article creates an attorney-client relationship.

limousine Ackley .. Lockport Chicago limo O’Hare

In The News:

A virtual private network can help ensure your information remains security and your privacy remains intact. Kurt the CyberGuy explains.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

Artificial intelligence-based cameras are giving air defense operators unprecedented capabilities in monitoring and protecting airspace.

Apple's iOS 18.1 Inactivity Reboot automatically reboots your iPhone if it hasn't been used or unlocked for more than three days, providing better data protection.

An inventor designed rooftop solar panels for a Tesla that draws solar energy while the car is parked, adding travel mileage without plugging in.

There are currently no laws governing what artificial intelligence can and cannot do with the information it gathers; here are 10 things to avoid telling AI chatbots to keep yourself safe.

A credit union with over 240,000 members recently revealed it was targeted by cybercriminals, resulting in a data breach that was part of a two-month attack by hackers.

Scammers have become skilled at creating convincing fake websites that can easily fool unsuspecting users. The CyberGuy offers tips to protect yourself.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

CAPTCHAs, which are used by websites to confirm whether users are people or bots, are harmless, but hackers are using them to infect PCs with malware.

Hackers recently leaked personal information of about 500,000 Americans and stole patient medical records that included lab results and insurance details.

The holiday season sees a rise in mobile shopping scams. Tech expert Kurt “CyberGuy" Knutsson helps you learn how to stay safe.

Tech expert Kurt “CyberGuy" Knutsson says a VPN enhances online banking security by encrypting data and protecting privacy.

Beware of these six sneaky holiday scams. Tech expert Kurt “CyberGuy" Knutsson gives you tips to avoid falling victim.

Tech expert Kurt “CyberGuy" Knutsson reveals how to securely back up and factory reset your Android to protect your privacy and data.

Artificial intelligence is making life easier for cybercriminals, allowing them to create elaborate scams to trick people. Kurt the Cyberguy explains how to protect yourself.

Cut through all the digital clutter and delete multiple emails from your Android simultaneously. Kurt the CyberGuy explains how it's done.

Tips to prevent your holiday decorations from being stolen

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

Kurt "CyberGuy" Knutsson lays out the immediate steps you should take if your phone has been hacked and your personal information becomes vulnerable.

Fraudsters are sending people bogus invoices through PayPal as part of a sneaky scam that is going around; here's how to protect yourself from being fooled.

A former Colgate-Palmolive employee was shocked to discover $750,000 had been drained from her 401(k) account. "CyberGuy" offers tips on how to prevent identity theft.

Electric vehicle maker Harbinger recently showed its electric delivery truck can handle icy roads with agility and stability in winter.

To make the busiest time of year more manageable, here are some tricks for tracking your packages, taking quality family photos and curating the perfect Christmas playlist.

Kurt "CyberGuy" Knutsson explains how to keep your online Amazon gift purchases a secret from loved ones or friends this holiday season.

S Corporation ? What Is It?

Small Business