If you are looking at forming a small business, Subchapter-S Corporation may be a good option because of the tax benefits and legal protections it provides shareholders.
What’s the big difference between an S-Corporation and a Corporation?
Without getting too technical, the biggest difference between an S-Corp and a C-Corp is the method of taxation. An S-Corp allows for profits, losses, deductions, and credit to be passed through shareholders before they are federally taxed. Shareholders then report income and losses on individual tax returns and pay taxes at ordinary rates. This means the S-Corp earnings are not subject to corporate tax rates and double-taxation, which is a characteristic of most C-Corps.
Essentially, S-Corps are only taxed on profits through the tax returns of its shareholders.
Characteristics of an S-Corp
- S-Corps require formal creation through the state.
- Flow-through taxation.
- No more than 100 shareholders.
- Limited Liability
- Cannot have more than 25% of its gross yearly receipts from passive income sources (example: rental income).
- There are restrictions on who can be a shareholder. Corporations and partnerships cannot be shareholders.
Advantages of an S-Corp
- Shareholders are shielded from liability. Only the corporation is responsible for debt and losses.
- S-Corps do not pay federal taxes at the entity’s level. This is a huge benefit to the company, especially if it is newly formed and money is tight.
Disadvantages of an S-Corp
- It can be costly to form and run an S-Corp. You will need to file Articles of Organization through the state, and you will need to obtain a registered agent for the business.
- There are few other disadvantages to forming an S-Corp, as long as you qualify under the requirements.
Interested in forming an S-Corp? Wondering if this is the right structure for you? G & G Law can help! Contact us today.