S-Corporation

What Is S-Corporation And How To Form One

S-Corporation is a regular corporation that has 100 shareholders or less and that passes-through net income or losses to its shareholders for tax purposes (similar to sole proprietorship or partnership). Since all corporate income is “passed through” directly to the shareholders who include the income on their individual tax returns, S Corporation are not subject to double taxation.

An eligible domestic corporation (C-Corporation) can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S Corporation. Generally, an S Corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S Corporation’s shareholders include their share of the corporation’s income or loss.

S-Corporation vs. C-Corporation

Advantages:

+ Like C-Corporations, S-Corporations are separate legal entities from their shareholders and, under state laws, generally provide their shareholders with the same liability protection afforded to the shareholders of C corporations.

+ Unlike C-Corporations, for Federal income tax purposes taxation of S corporations resembles that of partnerships. Thus, income is taxed at the shareholder level and not at the corporate level.

+ Certain corporate penalty taxes (e.g., accumulated earnings tax, personal holding company tax) and the alternative minimum tax do not apply to an S-Corporation.

 

Disadvantages:

Unlike a C-Corporation, an S-Corporation is not eligible for a dividends received deduction (a tax deduction received by a corporation on the dividends paid to it by other corporations in which it has an ownership stake).

Unlike a C-Corporation, an S-Corporation is not subject to the 10% of taxable income limitation applicable to charitable contribution deductions.

Unlike a C-Corporation, ownership of an S-Corporation is significantly restricted (read next).

 

Filing With IRS And The State

S-Corporation Election is filed with the IRS (Election by a Small Business Corporation, Form 2553), and that election is recognized by all states. with the exception of New York, New Jersey and Arkansas, which require additional state filing.

Retaining Profits of S-Corporation

S-Corporations (much like regular C-Corporations) are allowed to retain their net profits as operating capital. However, all profits are considered as if they were distributed to shareholders, and as a result shareholders might be taxed on income they never received (whereas a shareholder of C-corporation is taxed on dividends only when those dividends are actually paid out).

Converting S-Corporation Back to C-Corporation

S-Corporation status is not permanent and can be reversed back if so desired. For example, if the business becomes more profitable and there are tax advantages to being a regular C-Corporation, S-Corporation registration status can be dropped after a certain amount of time.

Who Can Form an S-Corporation?

S-Corporations are more suitable for small and family businesses, and for those who start their business with small investment. Also, some existing businesses qualify for S-Corporation status.

To form S-Corporation or to change your existing C-Corporation into S-Corporation (also called ” Election of S-Corporation Status“) certain conditions must be met:

  • S-Corporation cannot have more than 100 shareholders.
  • All shareholders must be either U.S. citizens or residents, estates, or certain trusts.
  • Can only have one class of stock. Preferred stock is not allowed.
  • Profits and losses must be accorded to owners in proportion with their ownership stake.
  • Must use the calendar year as its fiscal year unless it can demonstrate to the IRS that another fiscal year satisfies a business purpose.
  • Shareholders cannot deduct losses in excess of their investment.
  • The corporation cannot deduct fringe benefits given to employees who own more than 2% of the corporation.

 

Taxation of S-Corporations

As already mentioned above, S-Corporations are not subject to corporate tax rates. Instead, S-Corporation passes-through profit (or net losses) to its shareholders and those profits are taxed at individual tax rates on each shareholder’s Form 1040. The pass-through (sometimes called “flow-through”) nature of the income means that the S-Corporation’s profits are only taxed once – at the shareholder level. The IRS explains it this way: “On their tax returns, the S-Corporation’s shareholders include their share of the corporation’s separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss”.

S-Corporations therefore avoid the so-called “double taxation” of dividends in most states. There are however two exceptions to this rule:

  • California: There is a franchise tax of 1.5% of net income of an S-Corporation (minimum $800). This is one factor to be taken into consideration when choosing between an LLC and an S-corporation in California. On highly profitable enterprises, the LLC franchise tax fees, which are based on gross revenues, may be lower than the 1.5% net income tax. Conversely, on high gross revenue, low profit-margin businesses, the LLC franchise tax fees may exceed the S-Corporation net income tax.
  • New York City: S-Corporations are subject to the full corporate income tax at a 8.85% rate. However if the S-Corporation can demonstrate that a portion of its business was done outside the city, that portion will not be subject to the additional tax.

Ready to Order?

circle

Ready to Order?

We will prepare and file your LLC application in a professional manner, all you need to do is complete our simple order form.

Please feel free to contact our representatives to guide you via chat or telephone at +1 (877) 330‑2677.

Our company offers professional business filing services that ensure your company documents and applications are accurately filed and in compliance.

Ready to Register Your S-Corporation?

Digital Marketing & Websites
image

BUILD your Online Presence for Success!

Starting a new business? Let us use our decades of proven digital marketing expertise to help you create a successful online presence, a custom quality website, with online marketing you can trust.

We provide effective and proven, PPC, SEO, Email and Social Media advertising. No hidden fees, plus ongoing access to the team so you’re never in the dark.

Contact US | HERE

Strategic Advisor Board
image

Our team is here to help!

Allow me to introduce you to “Strategic Advisor Board”. SAB is an unprecedented collaboration of 10 experienced CEO’s and business strategists who are actively growing their own successful companies, but who come together to look at your business from every angle. With over two centuries of successful business experience the talent that SAB advisors bring to the table is second to none!

Payroll Processing
image

Get the simple, powerful payroll you deserve.

Our firm recommends ADP because our clients get access to simple payroll and HR solutions that fit their business needs, backed by 24/7 expert support.

If interested, please click on the logo above and get in contact with the leading company in payroll processing.

Payroll Processing Solution

Web Hosting Services
image

Get a Host that you can trust.

We recommend our clients to InMotion Hosting because they are an award-winning, reliable, and experienced Web Hosting Service provider.

Click on the logo above to receive access to discounts (up to 50%) for hosting services such as Business Hosting, VPS Hosting, Dedicated Servers, Reseller Hosting, and WordPress Hosting.

Web Hosting Service Solutions

Business Financing
image

At GP Solutions, we partner with Fortune 500 Financial Technology companies that have successfully helped businesses for over 16 years. We use advanced machine learning software that analyzes your overall personal and business credit profile.

The software creates financial strategies that will strengthen your personal and business credit profile.

Our strategies will help you get the capital funding you need!

Contact Us for a Consultation

Begin Web-Stat code v 6.0