If you are beginning a business, you may have posed the question, “What is an S Corporation?” If so, you are not alone, as many business people want to know how this form of incorporation works and how it may benefit them.
If you are a start-up business, learning more about an S corporation can indeed be beneficial, as the formation can save you tax-wise and can help you attract venture capital.
I can assist you in answering any questions along these lines. Email firstname.lastname@example.org.
To set up sub-chapter S corporation, you must be a U.S. citizen and limit the shares for your company to 100. In turn, you will not be double-taxed like a C corporation, and therefore can reduce your risk for insolvency.
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What is an S Corporation Designation and How Can It Benefit My Small Business?
Asking “What is an S corporation?” will lead you to several important discoveries.
S Corporation Benefits
Below are some advantages associated with corporations with sub-chapter S status>
One of the main benefits of an S corporation has to do with the payment of taxes. While a C corporation requires that you pay taxes on the entity and then the shares, you don’t have to worry about this when you are a subchapter S.
An S corporation is exempt from the payment of federal income tax with a few exceptions. These exceptions include the receipt of passive income or capital gains.
Like an LLC, an S corporation allows for pass-through taxation. Therefore, only the shareholders are taxed for earnings on their personal tax returns, and at each shareholder’s individual tax rate.
As a result, an S corporation’s profits are only taxed one time on the shareholder level. S corporations, in turn, avoid having to remit payment twice on company earnings, then on dividends.
Before you set up your S corporation, figure out how much you can save by speaking to an accountant and consulting with your lawyer.
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If you set up an S corporation, you automatically enjoy certain protections for your personal assets. These assets include you home and vehicle(s).
Therefore, shareholders cannot be held personally liable for an S corporation’s liabilities and debts.
In turn, a creditor or another business cannot go after your personal holdings to recover for a business debt.
More Income Flexibility
As an S corporation owner, you have more flexibility in defining what you make for tax purposes. For instance, you can pay yourself a salary and list yourself as an employee.
You can also pay yourself distributions that are taxed at a reduced rate or are tax-free. Doing so can help you offset your self-employment tax liability. *
*The IRS will take notice if you give yourself too low of salary to avoid paying the self-employment tax on the dividend part of your earnings.
Simple Transfer of Ownership
The interests in an S Corporation are simple to transfer to another owner. Therefore, you don’t have to make any changes in the formation of your company.
What is an S Corporation Status’s Meaning for You?
Next you need to ask, “What is an S corporation status’s meaning for you?” Will setting up this type of entity meet with your business plans and goals?
Reviewing the Numbers
To best determine what move you will make, you need to review some numbers.
Ask the following questions:
- What is my business’s annual net income?
- What am I currently paying for self-employment tax?
- What is deemed a reasonable salary for my role in the business?
Once you have the answers to these questions, you can consult with an attorney or an accountant to see if forming an S corporation is right for you.
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Give me a call or email me anytime about forming an entity for your business, whether it is an S corporation, C corporation, limited liability corporation (LLC), or partnership.
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What Is an S Corporation Entity’s Drawbacks?
While an S corporation is certainly an advantageous way to establish a company, you will have to be aware of some of the drawback.
Therefore, you need to ask, “What is an S corporation entity’s drawbacks?” before you decide on forming a subchapter S.
Some of the Limitations
Let’s look at some of the limitations.
If you set up an S corporation, you do not enjoy the same amount of flexibility in owning your company as you would with a C corporation.
You can only own one class of stock, which limits the appeal of your company to venture capitalists.
Also, as noted, you can only have up to 100 shareholders and can only be U.S. owned. You cannot be owned by foreign shareholders, corporate entities, or specific trusts.
The IRS always looks at businesses that can characterize their wages and dividends. Because you have this flexibility as an S corporation, it can also limit you.
In some cases, the IRS may ask you to re-characterize your earnings, which may lead to higher tax payments.
Loss of Subchapter S Status
While the incidence is rare, you still need to be aware it can happen. You may make an error, as an S corporation, related to filling and to filing your taxes.
Mistakes may relate to election, consent, stock ownership, and other aspects of owning and running a subchapter S. If this happens, you could lose your S corporation designation.
I can help you avoid any problems with complying as an S corporation legally. Contact me anytime with your question or to schedule a consultation.
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What To Do Next
You have read a good deal about forming an S corporation as a start-up.
However, you may still be asking “What Is an S corporation and how can this form of ownership benefit me?” If so, you have come to the right place.
Email email@example.com to get your questions answered and to form your company. Contact me 24/7 to arrange a consultation.
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