What Is An S-Corp
What is an S-Corp?
An S-Corp, or S Corporation, is a type of business entity that is taxed differently than a traditional corporation. S-Corps are pass-through entities, which means that the income and losses of the business are passed through to the shareholders on their personal tax returns. This can provide significant tax savings for small business owners.
How to Form an S-Corp
To form an S-Corp, you must first file articles of incorporation with your state. You must also elect S-Corp status with the IRS. To do this, you must file Form 8832, Election by a Small Business Corporation.
Requirements for S-Corp Status
To qualify for S-Corp status, your business must meet the following requirements:
- It must be a domestic corporation.
- It must have no more than 100 shareholders.
- All shareholders must be individuals, estates, or trusts.
- No shareholder can be a corporation or partnership.
- The corporation must not have any non-corporate shareholders.
Benefits of S-Corp Status
There are several benefits to forming an S-Corp. These include:
- Pass-through taxation: As mentioned above, S-Corps are pass-through entities. This means that the income and losses of the business are passed through to the shareholders on their personal tax returns. This can provide significant tax savings for small business owners.
- Limited liability: Like a traditional corporation, S-Corps offer limited liability protection to their shareholders. This means that the shareholders’ personal assets are not at risk in the event that the business is sued.
- Flexibility: S-Corps offer more flexibility than other business structures, such as sole proprietorships and partnerships. For example, S-Corps can issue different classes of stock, which can be helpful for attracting investors.
Drawbacks of S-Corp Status
There are a few drawbacks to forming an S-Corp. These include:
- More paperwork: S-Corps are required to file more paperwork than other business structures. This includes Form 8832, Election by a Small Business Corporation, and an annual S-Corp tax return.
- Higher taxes: S-Corps may be subject to higher taxes than other business structures, such as sole proprietorships and partnerships. This is because S-Corps are required to pay self-employment taxes on their profits.
Conclusion
S-Corps can be a good choice for small business owners who want the benefits of limited liability and pass-through taxation. However, it is important to weigh the benefits and drawbacks of S-Corp status before making a decision.
Call to Action
If you are considering forming an S-Corp, you should consult with an attorney or accountant to discuss your specific situation. They can help you determine if an S-Corp is the right choice for your business and help you file the necessary paperwork.