If you are not familiar with them yet, S Corporations are simply companies (corporation or limited liability corporation) which do not pays any taxes on its corporate profits. Under the Internal Revenue Code’s chapter 1 and Subchapter S, only the shareholders would have to pay their income taxes from the earnings they received from the company. In short, an S Corporation is taxed more like a sole proprietorship rather than a C Corporation.
There are many C Corporations who have filed for S Corporation status because of the difference between the two tax structures. Because of this set-up, the S Corporation actually enjoys several tax advantages over C Corporations. They include:
o Any losses incurred by the company can be passed to its shareholders. This way your income tax return can reflect the same losses allowing you to pay less in taxes.
o As an S Corporation, you get to enjoy the privileges of not paying any corporate taxes and at the same time enjoy a level of limited personal liability protection.
o Compared to single-member limited liability corporations, S Corporations do not have to pay any self-employment taxes, which can be quite considerable.
o On the other hand, the S Corporation’s advantage over multiple-member LLCs include not paying self-employment taxes and low accounting costs, since LLCs like this would require extensive and complicated accounting.
If you are interested in becoming an S Corporation, there are certain requirements set by the IRS that you must fulfill. Among them are (1) you must be an eligible entity with no more than 100 shareholders, (2) all shareholders must be a resident or citizens of the United States (3) must possess only one type of stock and (4) shareholders must receive profits according to their business interest.
If you meet all these requirements, then you will simply have to file an IRS Form 2553 within 75 days of the initial tax year. Depending on the state you are in, different tax laws may implemented, it would be wise to check them before applying for the S Corporation status. Also, you must keep in mind that an S Corporation would incur higher cost compared to sole proprietorship. Even if you file taxes online, S Corporation would require much better bookkeeping and accounting.
For additional tax tips, you can search the latest information over the internet. There are many resources that both discusses the advantages and disadvantages of S Corporations.