An S corporation is a legal entity that is subject to pass-through taxation. It is also easier to transfer ownership than other business structures. There are no shareholders, and transfer of ownership can take place immediately or over time, depending on the terms of a written sales agreement.
Legal Entity
An S corporation is a legal entity, similar to a corporation, but with a few differences. First of all, S corporations are pass-through entities. As such, their taxable income is passed through to the owners of the business, who then pay taxes on it. This entity type is especially appealing if you want to save on FICA taxes.
Once you’ve filed your articles of incorporation with the IRS and your state’s business office, you’re ready to move on to the next step, which is forming your S Corp. Next, you’ll need to elect a board of directors. These individuals represent the company’s shareholders and hold meetings regularly. They also develop policies to run the business.
Business
When it comes to taxes, an S corporation differs from a partnership in several ways. For one thing, an S corporation’s owner is not an employee for tax purposes, whereas an LLC’s owner is an employee for tax purposes. Consequently, if an S corporation’s owner performs more than minor services for the corporation, that individual becomes an employee. This means that an active owner will be wearing two hats.
While an employee of an S corporation can receive a salary from the corporation, this compensation must be reported on the employee’s income tax return. In addition, the shareholder-employee must pay their share of the employer’s payroll and FICA taxes. The S corporation must also withhold and pay state and federal unemployment taxes.
It Is Subject To Pass-Through Taxation.
Under the Internal Revenue Code, a business can be either a C corporation or an S corporation. Generally, the latter is less taxed, as income passes through to the shareholders on a pro-rata basis. An S corporation must have at least 35 shareholders, and these shareholders can include trusts, married couples, estates, and corporations.
An S corporation’s taxation is based on its shareholders’ share of the corporation’s income, deductions, and credits. These items are passed to the shareholders, who report them on their tax returns. To qualify as an S corporation, the IRS must approve a business. The state where the business is located also has laws that apply to S corporations.
Another benefit of S corporations is that the IRS does not tax the corporation directly. Instead, it taxes the owners’ share of the corporation’s earnings, so they receive a lower tax bill than if the company was treated like an individual. This benefit is especially beneficial for those who plan to transfer their business ownership or discontinue it. Further, shareholders are not liable for the company’s debts.
It Provides More Privacy Protections.
An S corporation is a type of corporation. It’s an excellent option for fast-growing, leaner companies. However, S corporations have specific restrictions regarding shareholding classes that can limit future business growth. As such, it’s essential to consider your long-term vision for your business before forming an S corporation.
It Is Easier To Convert To A C Corporation.
You have several options if you have a new business and want to convert to a C corporation. While an S corporation can operate as a pass-through entity, it is more convenient than a C corporation. For one thing, you will have to wait five years before you can file for another type of business structure. Another option is to terminate the S corporation and then convert to a C corporation. This way, you will not be liable for double taxation and can use the money you have saved for future expenses.
Converting to a C corporation is a complex process that requires careful consideration. Depending on your unique business, you will likely need to conduct extensive projections and calculations. A tax consultant can help you determine your business’s best option.
