To set up an S crop you have to fill the “articles of incorporation form” through the IRS. Form no 2553 must contain the details about your company and other important information that can help you kick start the process of formation. In addition to this, you also have to keep in mind that in order to start an S corp you must have US residency alongside one class of stock and 100 shareholders.
The question to this answer is not straightforward because both an S corp and LLC are two separate entities. Wherein an LLC is a legal entity that must choose to pay tax as either a C corp or an S corp. This is also indicative of the fact that an LLC can act as an S Corp if it opts for a single-layered taxation system.
The major difference between an S Corp and C Corp is that of income tax. An S corp is taxed individually wherein stockholders have to pay a share from their personal income (excluding the dividends). On the other hand, C Corps are taxed twice. In simple words, they are taxed on personal as well as corporate levels, inclusive of the dividends and profits.
It’s very simple. An S corp formation comes with an added advantage in terms of income taxes. As an S corp, you will be taxed once – single-layered taxes. Along with that, you also have an upper hand when it comes to protecting your personal assets. No creditors or money lenders can claim access or authority over your bank account and other personal assets.
S Corp stands for “Small Business Corporation” or “Subchapter S Corporation”. It is a tax classification or status where a business entity, whether an LLC or a general corporation, qualifies the requirements of an S Corp as per the guidelines of the Internal Revenue Service or IRS.
An S Corp is tax status which business entities can file for with the IRS. It basically allows them to avoid federal corporate income taxes and get the advantage of being a ‘pass-through entity.
Passed through refers to all profits and losses being shared or passed through between individual shareholders and being able to report it on personal income tax returns.
In order to qualify for an S Corp status, a business entity must fulfill the following:
- Must be a domestic business.
- Have a maximum of 100 owners or shareholders who are individuals, trusts or estates. (partnerships, corporations and non-residents are not accepted as viable shareholders).
- Must have one class of stock only.
- Must not be a financial institution, insurance company or domestic-international sales corporations.
Unlike a regular corporation, an S Corp doesn’t pay corporate taxes levied by the federal government. Instead, they pass their income (profit or loss) through their shareholders and split the total revenue. As a result, the income is split between multiple people which can then be taxed on every individual’s personal tax returns. This way, the business entity avoids double taxation.
S Corporations can have employees but they can operate with no employees too. Now, while an S Corp may not have an employee working on a wage, their shareholders performing any work within the company will be considered as ‘employees’ for the purpose of taxes. In this case, any distribution of profits will be considered as income and subject to taxes.
Yes, most Limited Liability Companies can have S Corps as owner or members. Since S Corp is a business entity and has a ‘pass through’ profit and loss structure similar to an LLC, it can own a general (not professional) LLC legally as per the IRS.
You can enjoy the following advantages of filing as an S Corp:
- Personal assets are protected since all business liabilities are passed through the shareholders.
- Business entities do not have to pay federal corporate taxes.
- Pay taxes at individual levels.
- Easy storck distribution to up to 100 shareholders.
- Easy transfer of ownership without any possible tax consequences.
No, sole proprietorship is not the same as an S corp. One of the biggest and basic differences between the two is in terms of their liability. While an S corp has limited liability protection, a Sole Prop does not provide any legal separation between the owner and the business.
In terms of taxes, a Sole Prop pays self-employment tax which is calculated on the net profit of the business. Whereas an S corp pays taxes on their individual incomes and not on the profit of the entire business entity.
While S Corp status has several advantages, it does have some disadvantages too.
- One, S Corps are subject to closer tax scrutiny by the IRS. The owners become employees and must have a ‘reasonable salary’ to avoid any fines or back taxes.
- Two, a business entity must strictly fit in the requirements of an S Corp set up by the IRS or the status will be revoked.
- Three, S Corps have early tax filing deadlines compared to other business entities.
Yes, you can terminate an S Corp Status accidentally. This can happen if one of the following applies to you:
In this case, you cannot re-elect S corporation status for five years without the consent of the IRS.
- Your business ceases to qualify as an S Corp.
- You exceed the passive income limitation.
- Your business issued a second class stock.
- You have more than 100 shareholders.