S Corporations
One of the Best Choices for Small Business Owners
Many attorneys and accountants recommend forming an S corporation for small business owners who provide a service or sell a product. An S corporation provides limited liability protection for personal assets and provides similar tax benefits to operating as a sole proprietor or partnership. In addition, operating as an S corporation may enable you to save considerable money on the FICA or self employment taxes.
An S corporation is initially formed just like a regular C corporation based upon the requirements of the state in which it is formed. Then the shareholders elect a different tax status by filing the S election form with the IRS. The same liability protection applies, regardless of whether the corporation is a C corporation or an S corporation. The only real difference is in the tax treatment of income generated by the business.
A regular or C corporation is a taxable entity and must pay income tax on its net income. S corporations are taxed similar to partnerships. That means that the net income of the business passes through to the individual shareholders based upon their percentage of share ownership. The shareholders must declare their share of income from the S corporation on their individual tax returns. The S corporation itself files an informational return much like a partnership.
S corporation election is made by filling out and filing form 2553 with the IRS. The tax law affords you 75 days after incorporation or 75 days from the start of each new calendar year to file for S election status. If approved, your business will then be subject to the tax laws most like a partnership rather than a regular C corporation. Since each situation is unique, you should first consult with your accountant or tax adviser before making the election.
S corporation election may enable you to save considerable money on the FICA or employment taxes (the 15.3% of social security and medicare taxes) and avoids double taxation of profits as sometimes occurs in a regular C corporation.
The operation of an S corporation is the same as a regular C corporation and is governed by the same corporate laws in the state of incorporation.
To help you decide if an S corporation is best for your business, please feel free to call us toll free at 1-888-527-6207. |
