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. 

Consult with a legal expert to learn more about an S-Corporation

Join me on Saturday when we discuss if you want to establish a non-profit 501(c)3