Hi! I’m Bette Hochberger, CPA, CGMA. For business owners considering their corporate structure options, understanding S corporations is essential. An S corporation status can offer significant tax benefits, but is it the right choice for your business? In this blog, I’ll discuss what an S Corp is, how to become one, and the advantages it offers.
What is an S Corp?
An S corporation, or S corp, refers to a special tax designation granted by the IRS to eligible corporations. Unlike traditional corporations, S corps are exempt from paying corporate income taxes. Instead, their income, losses, deductions, and credits pass through to their shareholders’ personal tax returns.
Eligibility and Filing for S Corp Status
Eligibility Criteria
– Must be a domestic corporation
– Have only allowable shareholders (individuals, certain trusts, and estates)
– Have no more than 100 shareholders
– Have only one class of stock
Filing Process
To become an S corporation, a corporation must submit Form 2553 to the IRS, signed by all shareholders. This election must be made by March 15 of the current tax year for the designation to apply for that year.
Advantages of an S Corporation
- Tax Benefit: The most notable advantage of an S corporation is the tax pass-through status, avoiding the double taxation faced by C corporations.
- Asset Protection: Shareholders enjoy limited liability protection, which means personal assets are generally protected from business debts and liabilities.
- Investment Opportunities: S corps can attract investors, although they’re limited in the type and number of shareholders.
- Estate Planning Benefits: Shareholders can transfer interests without facing adverse tax consequences, making it easier for estate planning.
Considerations Before Forming an S Corporation
– Tax Qualification Obligations: Strict adherence to the eligibility criteria is required to maintain S corp status.
– Shareholder Salary Requirements: The IRS scrutinizes the salaries paid to shareholder-employees to ensure they are reasonable.
– State Tax Laws: Some states don’t recognize S corp elections or tax S corps differently, so it’s important to consider the state tax implications.
Deciding to elect S corporation status involves balancing the potential tax benefits with the obligations and limitations of this designation. It’s a viable option for many small businesses, but it’s important to understand the requirements and implications fully.
Consulting with a tax professional or a corporate lawyer is recommended to determine if an S corporation is the right fit for your business. If you’re looking to form an S Corp, feel free to set up a meeting with me and let’s discuss more.
I’ll see you all again next time!
