When starting a business you have a number of different Business structures to consider. An S Corporation one such structure, representing a special type of corporation chosen as part of an IRS tax choice. Those corporations domestically registered are able to avoid double taxation when they choose to be treated as an S Corporation.
IRS Business Structure: S Corporation
The IRS considers an S Corporation under the subchapter S designation. To qualify as one you must charter your Business as a corporation in the state where it is domiciled or headquartered. It must be a unique entity, organize separately and apart from its owners. In making this business structure choice it limits your financial liability. However, you only gained partial liability consideration—there’s always a possibility that you will be subject to certain types of litigation.
An S Corp, unlike a C Corp, allows profits and losses to pass through to your personal tax return. Thus, the business itself is not text—just the owners or shareholders. However, any shareholder who for the S corporation must be compensated reasonably. The IRS Will scrutinize your business to ensure that compensation is being made.
File With Your State First
Before filing, you need to register your business as a corporation in your state. Your shareholders then must sign an IRS form to make your enterprise an S Corporation. Verify with the IRS that your business does, indeed, qualify for this categorization.
Once your business has been filed, then go ahead and obtain the necessary permits and licenses required to operate your business. Check with your local town, county, And state to find out how this process is handled. If you plan to hire employees there are other state and federal that also must be followed.
S Corporation Advantages
There are number of advantages of having an S Corporation. For one, you and your business can enjoy tax savings. You should know that only the wages of the corporations shareholder who is an employee is subject to the employment tax. The rest of the income is treated as distribution and his text at alone or right, sometimes not at all.
Personal expenses that a shareholder incurs related to the Corporation can usually be written off as business expenses. There are exceptions and rules to follow; contact the IRS to follow those guidelines. Certain benefits, however, may still be taxable. These include medical and life insurance.
Another advantage to an S Corp is that if a shareholder leaves typically has no affect on the business. Thus, old shareholders can leave an new shareholders can come in without interruption to your business.
S Corporation Disadvantages
Just as there are advantages to an S Corporation there are some disadvantages that must be considered. For one, you are required to have scheduled shareholder and director meetings and keep minutes of the same. Detailed records, Including updates to bylaws, stock transfers and records of those meetings must be kept.
You should also know that there are certain shareholder compensation requirements that must be followed. We already looked at the reasonable compensation requirement for shareholders who are employees. If you are not paying your people in enough than that can trigger an audit from the IRS. For instance, paying your human resources Director $25,000 a year Will probably not be considered reason all compensation. If not handled correctly you may end up paying a higher employment tax and fines for your mistake.
S Corporation Considerations
If you are not sure what direction to take with your business structure speak with an accountant to learn your options. You may find another structure is better suited for your business, something you should pursue instead.
See Also — Business Legal Services