It’s your business and livelihood. You’ve worked hard to build, nurture, and establish them both; and the benefits of an S Corporation may be the best way to protect it all. An S Corporation or S Corp is similar to a type of corporation — offering investment opportunities, the ever-so-important protection of limited liability, and perpetual existence.
However, unlike a regular corporation, one of the key benefits of an S Corporation is you’ll only need to file taxes once a year and are not subject to double taxation. Does this sound enticing? Continue reading to learn more about whether the benefits of an S Corporation outweigh the costs.
What Are the Benefits of an S Corporation?
There are several benefits of an S Corporation, including – but not limited to the following:
- S Corps offer investment opportunities. Your S Corporation can attract investors and is eligible to sell shares of stock.
- Limited liability. You, your company officers, directors, shareholders and employees all enjoy limited liability protection.
- No double taxation of income. With an S Corporation, your income isn’t taxed twice as dividend income and again as corporate income.
- Pass-through taxation. Owners report their share of loss and/or profit on each of their individual tax returns.
- Annual tax filing requirements. While regular corporations must file each quarter, S Corporations are only required to file one time a year.
- Perpetual existence. Your S Corporation will continue to exist even if you (the owner) die or leave the business. It’s an excellent way to leave a legacy for kids and family.
Downsides to Forming an S Corporation
Although the benefits of an S Corporation are many, there are a few things you should consider prior to adding the “s” to your corporation. Let’s look at a few of the most notable downsides.
- Obligations for taxes. Making mistakes on the various filing requirements may result in the accidental termination of your S Corporation.
- Tighter IRS scrutiny. Payments to shareholders and employees can be distributed as either dividends or salaries. However, each type of payment is taxed differently, which causes the Internal Revenue Service to more closely scrutinize these payments.
- Citizenship requirements. While anyone can form an LLC or a C Corporation, only permanent residents and U.S. citizens are allowed to enjoy the benefits of the S Corporation.
- Limited ownership. You can’t have over 100 shareholders with an S Corp.
- Formation and ongoing expenses. You must first incorporate your small business by filing Articles of Incorporation through your desired state, obtain a registered agent for your business, and pay any associated fees. Some states even require ongoing fees, like a franchise tax fee and an annual report fee.
Planning Ahead with Reducible Taxable Gains of an S-Corp
If you start your business with the intention of selling it at some point or if you want to work on a side project for a few years and plan to move back into the workforce, then the S Corporation can be extremely attractive!
Whenever you sell the business, the owner’s taxable gains can be much less than they would be if you were to sell a C-Corporation. Since this is a relatively complex transaction, make sure to work with a qualified certified professional accountant for the implications.
Benefits of an S Corporation Include Easy of Transfer
Even if you have the best of intentions and plan to run your business forever, things happen. And if something happens and you need to transfer ownership, it can mean a lot of extra hassle with most forms of incorporation. However, transferring ownership is much easier with an S Corporation through the sale of stock.
Don’t Wait for Form Your S Corporation
In order to form an S Corporation, the IRS places multiple restrictions, including:
- The S Corporation can’t have over 100 shareholders
- All shareholders must be permanent residents or U.S. citizens.
- Partnerships or LLC cannot be a shareholder of an S Corporation
If your business meets the criteria to form an S Corporation, it’s important to beat the deadline of applying with the IRS. You are allowed 75 days from the date you incorporate your business to properly file paperwork for the S Corporation. You’ll need to use IRS Form 2553.
If you already have a business and want to be an S Corporation, you’ll need to file within 75 days of the beginning of the tax year. So, any established business must file prior to March 15 to be considered for S Corporation tax filing status.
Contact Dennehy CPA for Professional Accounting
Whether the benefits of an S Corporation make sense for your business will depend on a variety of factors, including your situation and finances. Before making a decision, it’s best to take some time to learn the differences between an LLC, S-Corp, corporation and other filings.
In either case, there is no hard and fast answer to whether the benefits of an S Corporation would out weight the costs because every business situation is unique. However, the experts at John F. Dennehy Jr., CPA, PC are here to help.
We specialize in helping business owners make viable decisions and choose the best tax filing based on their unique situation and goals. Contact us today to learn whether the benefits of an S Corporation would outweigh the costs for you.