Larry on Business: Business Growth: Establishing an S-Corporation

Thursday, March 1, 2012

Business Growth: Establishing an S-Corporation

This continues our series on establishing a legal entity for your business. I am not an attorney. Consult legal counsel for advice.

The IRS defines an S-Corporation,

“S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.”

Qualifications of an S-Corporation

The IRS states “To qualify for S corporation status, the corporation must meet the following requirements:

Be a domestic corporation
Have only allowable shareholders
- including individuals, certain trust, and estates and
- may not include partnerships, corporations or non-resident alien shareholders
Have no more than 100 shareholders
Have one class of stock
Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.

In order to become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation (PDF) signed by all the shareholders.”

Benefits of an S-Corporation

BizFilings.com shares the following:

Limited liability protection. Owners are not typically responsible for business debts and liabilities.
Easy transfer of ownership. Ownership is easily transferable through the sale of stock.
Unlimited life. When a corporation’s owner incurs a disabling illness or dies, the corporation does not cease to exist.
Raise capital more easily. Additional capital can be raised by selling shares of stock.
Credibility. Corporations may be perceived as a more professional/legitimate entity than a sole proprietorship or general partnership.
Lower audit risk. Generally S corps are audited less frequently than sole proprietorships.
Tax deductible expenses. Business expenses may be tax-deductible.
Self-employment tax savings. An S-Corp can offer self-employment tax savings, since owners who work for the business are classified as employees.