What Is an S Corporation S Corp?

If you’re electing S corp status as a C corporation, you must submit Form 2553, Election by a Small Business Corporation to the IRS, signed by all of your company’s shareholders. For years, small businesses complained that double taxation was making it hard for them to succeed. In 1958, Congress amended the Internal Revenue Code to provide small businesses with relief from double taxation. They added Subchapter S to the Internal Revenue Code — the subchapter which gives us the name “S corporation”. After your Articles of Incorporation are filed, you need to file Form 2553 with the IRS to elect S corporation status for your company. With BizFilings’ Basic and Standard Incorporation Services, we will provide Form 2553 to you for you to finalize and submit to the IRS.

You must also pay filing fees and any applicable initial franchise taxes or other fees. The type and amount of information required in the incorporation documents varies by state. If your corporation is eligible to become an S corp and the benefits align with your company’s needs, then you’ll need to elect the S corp status during the correct window of time to receive the tax benefits. The IRS has laid down many criteria to qualify for the S corporation status which restricts the type and number of shareholders. For example, foreigners can’t be shareholders; all the owners need to be U.S. citizens or permanent residents. Even during a transfer of ownership, the transfer can only be done to specified individuals, an estate, or trusts.

Start your S corp today

If you’re electing S corp status as an LLC, you’ll need to file Form 2553, Election by a Small Business Corporation. As your company gets larger and starts to earn more profits, it is usually a good idea to think about setting up a corporate structure. And one of the most popular is the S Corp.  After all, you can potentially gain some nice tax benefits. The CT Corporation staff is comprised of experts, offering global, regional, and local expertise on registered agent, incorporation, and legal entity compliance. For new corporations, the tax year almost never begins on January 1.

Furthermore, individual shareholders are not personally liable for the company’s debts or obligations. Both LLCs and corporations can opt to become S corporations; however, no state offers entrepreneurs the opportunity to become an S corporation. S corporations have the ability to avoid double taxation since an S corporation is a pass-through entity. Profits are passed on to shareholders, who report them as personal income versus the corporation paying taxes on them. In contrast, S corps do not face this double taxation, at least at the federal level (some states treat S corps as C corps). S corp earnings can be passed through directly to shareholders, who report this income on their personal tax returns.

Meeting Requirements

You still must issue K-1s to shareholders just like with a partnership. You may wonder why S corp owners don’t just take a salary of $0 to avoid self-employment taxes altogether. Schedule D is where you’ll report any capital gains or losses your S corporation sustained this year (i.e. money it made buying or selling stocks, bonds and other assets). BizFilings can help you quickly form an S corporation in three easy steps. Get your S corp started today and explore our flexible packages and tools for forming your business with the state, keeping your business compliant, and fulfilling additional state and federal requirements. If you’re still unsure whether an S corp is right for you or have more questions about how and when to file, you should talk to a small business lawyer.

When compared with sole proprietorships or partnerships, S corporations have an edge on aspects like transfer of ownership and continuance of the business. However, S corporations can be disadvantageous for a single-owner, small business (less than $50,000 annually). While large companies are typically C corporations, small business owners often prefer S corp. taxation because their profits aren’t taxed at both the corporate and shareholder level. Instead, business income, deductions, losses, and other tax items flow through (or pass through) to the business owners (e.g., the shareholders). The S corporation files an information return (Form 1120S) with the IRS stating each owner’s share. Business owners must pay tax on their share of the S corporation’s income, even if the money stays in the business instead of being distributed.

File Articles of Incorporation

The catch here is that if you’re a shareholder and an employee of the company, which most small business shareholders are, you must pay yourself a “reasonable salary” before paying yourself a tax-free distribution. Schedule K brings together information about your Understanding S Corporations business’ income, deductions, and any tax credits your business qualifies for. You’ll use the information you bring together on this schedule to file a separate Schedule K-1 for each shareholder in your S corp, based on the percentage of total shares they own.

This means the net profits are essentially taxed twice, once as a corporation and one at the personal shareholder level. Most people need s corp taxes for dummies as S corporations are one of the most misunderstood business organization types. It’s likely because it’s more of a tax designation rather than its own form of entity. This can be much better than a C-Corp, which essentially has “double taxation” (the profits are taxed and so are the distributions). What’s more, depending on the circumstances of a shareholder of an S-Corp, there may be the ability to use losses to offset other income.

They can explain how the S corp election applies to your specific situation and file the IRS paperwork for you. If you file for the election after the deadline but want the S status to take effect that current tax year, you might qualify for special relief. If you qualify, your S election status will take effect the current tax year—instead of the next year—despite the late filing. If you have a larger, faster-growing company, sticking with the C corporation might be a better fit.

• A C corporation is the standard (or default) corporation under IRS rules.
• For a qualifying corporation to obtain S corp tax treatment, an S corp election has to be properly made using the correct forms and within a certain period of time.
• Of course, the type of business entity that a small business owner chooses depends on many factors.
• With BizFilings’ Basic and Standard Incorporation Services, we will provide Form 2553 to you for you to finalize and submit to the IRS.
• S Corps must have bylaws, meetings with stringent minutes, K-1s for owners, and an extra tax return – the 1120-S.
• There are several organizational forms that businesses can choose from, including sole proprietorship, partnership, limited liability company (LLC), corporation, or an S corporation.

It has to be made during the corporation’s tax year and on or before the 15th day of the third month of its tax year. An S Corporation has high credibility among potential vendors, customers, and partners, as an S Corporation is a recognized business structure. If you are an S corporation shareholder then you may be liable for… When deciding whether or not to file as an S Corp in California, it is essential to understand the advantages and disadvantages of doing so.

Withholding on California source income

It’s always a good idea to file the election early so you don’t have to worry whether you made it in under the deadline for your first tax year. However, in some cases, an S corp’s shareholders might qualify for the pass-through deduction while an LLC’s owners with the same amount of income might not. To do so, it must file Form 2553 any time during 2015, or no later than March 15, 2016 (two months and fifteen days after January 1, 2016, the first day of its current tax year). If it files the election after March 15, 2016, the election won’t be effective until 2017 unless it qualifies for special relief. Once the incorporation process is complete, all shareholders must sign and submit Form 2553 to be granted the S Corporation designation.

But either a corporation or an LLC can change the way the business is treated for tax purposes by electing S corp.  taxation. The tricky part, however, is that it’s not exactly clear how much an S corp owner should take in salary versus distributions. If you tried to game the system by taking, say, $20,000 in salary and $80,000 in distributions so that you could minimize payroll taxes, you could run afoul of the IRS. To qualify as an S corp, a company has to meet certain requirements such as being a domestic corporation and having a maximum of 100 shareholders. An S corp works by having a business owner file for S corp status with the Internal Revenue Service (IRS) and potentially with relevant local tax jurisdictions. You have until two months and 15 days to file following the start of the tax year in which you wish for the S corp status to take effect.

Advantages and Disadvantages of Filing as an S Corp in California

Once a company has S corp status, the shareholders (who could just be one person, if you own 100% of your business) can then decide how best to distribute earnings for tax purposes. In many cases, an S corp owner https://kelleysbookkeeping.com/common-size-financial-statement/ will pay themselves a salary and then take some earnings as distributions. The salary would be taxed at ordinary income tax rates and incur payroll taxes, whereas the distributions would only incur income taxes.