S-corporation, form an s corp today using our corporation services

S-Corporation


what is it and how to form one?

Any corporation with less than or equal to 100 shareholders where the gains and the losses are passed onto the shareholders for the purpose of taxation, similar to the workings in partnership or sole proprietorship is referred to as S-Corporation. Given that the shareholders receive every penny/cent of the corporate net income including that of their individual income from returns on taxes, there is no double taxation concept in S-Corporation.

Any domestic C-Corporation can get an exemption from double taxation (each to the shareholders and the corporation separately) by preferring to be treated as an S-Corporation. Also S-Corporations are generally not considered for the income tax by federal authorities apart from passive income and a few capital gains. When filing their returns, the shareholders of the S-Corporation will include the share of loss or income of the corporation as part of their filing.




Comparing C-Corp Vs S-corp


Benefits

  • Similar to the C-Corporations, the S-Corporations are also individual legal entities and are not considered along with their shareholders as a single unit. In fact as per the laws of the state, the S-Corporations also provides its shareholders with the same level of protection on liability, like in the case of C-Corporations.
  • In the calculation of federal income tax, the S-corporations follow the logic similar to that of partnerships unlike the C-Corporations. So there is no double taxation but only a tax at the level of shareholders. There is no tax at the corporate level.
  • Alternative minimum tax, personal holding company tax, accumulated earnings tax and other similar corporate penalties are not applicable in case of S-Corporations.

Drawbacks

  • There is no deduction of tax on the dividends received by S-Corporations unlike the C-Corporations. This is the dividend paid to the corporation by other similar organizations for having a stake in their company.
  • There is no 10% limitation on the taxable income for deductions on charitable contributions for S-Corporations, unlike the C-Corporations.
  • There is a lot of restriction on who can form the S-Corporation which is again not like that of the C-Corporation where there is more flexibility.


Who are eligible to form an S-Corp?


Anyone who owns a small or a family business or who is looking to start a new one with a small investment will do well with having a S-Corporation. Of course, some existing businesses can also qualify for elevating themselves to the status of S-Corp by fulfilling certain conditions.

In order to form a new S-corporation or to change your existing business to a S-corporation, you have to ensure that the below conditions are met.

  • The number of shareholders cannot be more than 100.
  • The shareholders must be citizens of US or residents in US or estates or a few trusts as considered applicable or eligible.
  • The class of stock can only be one and you cannot have preferred stock as an option.
  • The loss and the income or profits have to be accorded to each of the share holders/ owners in the same proportion as their stake in the company.
  • The fiscal year should be the calendar year unless the company can prove that another fiscal year will be a better option for the business to the IRS.
  • The losses have to be in lieu of the investment of the shareholders and cannot be deducted more.
  • If employees have more than 2% stake in the corporation, then you cannot deduct fringe benefits for those employees.


Benefits of S-Corporation


  • When you form a S-Corporation, you have the option to pass your loss from business onto your personal tax return so that you can offset it against any other income you might receive from any other source, other than the S-Corporation.
  • There are no self employment taxes to be levied on the shareholders of an S-Corporation. These amount to nearly 15% more than your income and can be used for paying the Medicare and Social Security taxes.
  • The taxable portion of the gain that you make when selling your S-Corporation, is much lesser than what it would be if you were to sell a normal corporation.


S-corporation taxation


There are no corporate taxes levied on S-Corporation, as we have discussed already. In case of S-corporation, the income or the losses are passed through to the shareholders and these are taxed, (the profits) at the individual shareholder level (refer to Form 1040). Also referred to as the “flow through”, the pass through process of the net income or loss, ensures that the tax is applied only once, that is at the shareholder level. As per the explanation provided by the IRS, “On their tax returns, the S-Corporation’s shareholders include their share of the corporation’s separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss”.

Hence the S-corporation is able to avoid the double taxation, unlike the C-Corporations in many states of the country. Only two states have an exception to this as provided below:

  • New York City: All the S-corporations have to borne the full tax for corporate, that is 8.85%. In case a part of the business was performed outside the city, and the same can be proved by the company to the tax authorities, then that portion will be exempted from this tax rate.
  • California: A tax of 1.5% of the income is levied as franchise tax with a minimum amount threshold at $800. So if you are setting up a business in California, then this definitely bears a big influence in choosing between an LLC and a S-Corporation. If you have an enterprise that is running on high profit, then the franchise tax on the LLC which is calculated on gross profit, will be considerably lower than the 1.5% of the net income. In which case, setting up an LLC is a better option. However, if you have a low profit margin, then you would do well with a S-Corporation rather than a LLC where the taxation will be much lower.

Can you retain the profits in the case of S-Corporation?


One can retain the profits they make in their business, in case of S-corporation, as part of their operating capital. And yet, when it comes to considering the shares of profit distributed to the shareholders, then even the profits that were retained as part of the operating capital are taken into consideration. In this case, the shareholders are taxed even on the profits they have not received. On the other hand, in C-Corporations the shareholders are not taxed if the dividend was not paid out to them.

Conversion from S-corp to C-corp.

The status of S-corporation is not a permanent one and can be reversed out when required. For instance, if your business grows up into a high profit enterprise and you would benefit more by being a C-Corporation, then you can definitely revert back to the status. The status of the S-corporation can be easily dropped after a little time.

Want to order?

If you want to register your business as S-corporation, you can simply fill in the form on this page and we will help with both registration/incorporation and election form filing for your S-corporation. You can get in touch with any of our support executives over phone or chat.

We ensure that your documents for incorporation are filed with utmost compliance and accuracy and the documents are well in order for your business.