Thinking about an “S” Corporation?
What sets S Corps apart
The most common business structure for small businesses is the S Corp, which differ from C Corps in that they have a special tax status with the IRS. While they still file a federal tax return, they don’t pay income tax at the corporate level. Rather, the profits and losses of the business are “passed-through” the business to the owners’ personal tax returns, meaning taxes are paid at a personal tax rate rather than a corporate tax rate. Learn more about the pros and cons of forming an S Corp below.
PROTECTION FROM PERSONAL DEBTS AND LIABILITIES
For businesses that choose an LLC business structure, their personal assets are considered separate from the personal interest invested in the company. This means that debts and liabilities incurred are the responsibility of the business rather than its members.
EASILY CONVERTIBLE
As your business grows, it may also outgrow the entity type you originally filed. Because S Corps only majorly differ from C Corps in how they’re taxed, it’s not difficult to convert to a different entity type need be.
PROTECTION OF PERSONAL ASSETS
S Corps are granted limited liability protection status, preventing courts from pursuing an owner or shareholder’s personal assets to pay debts held by the business.
PASS-THROUGH TAXATION
The most notable benefit provided to S Corps is their “pass through” taxation status, which can help owners reduce their overall tax liability. Also, S Corporations are unique in that they have the ability to distribute stock, but only to a limited number of owners.
A few differences between C corp & S corp.
How it's taxed
S Corp: Once—only shareholders pay taxes on profits received.
C Corp: Twice—the business pays taxes at the corporate level, and shareholders pay taxes on income received.
How it's owned.
S Corp: Limited to 100 shareholders who must be U.S. citizens or residents.
C Corp: No limits on how many people and who can own shares.
How shares work
S Corp: Owners can only get common stock which comes with voting rights.
C Corp: Owners may get preferred stock—which comes with no voting rights but priority to dividends before common shareholders.
“S” Corp FAQs:
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What are the primary advantages?
S Corporations are eligible for special pass through taxation status with the IRS. This allows S Corporation owners to avoid double taxation on their business income.
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Are there any restrictions on who can file?
Outside of some state-specific regulations that require individuals to be 18 to own a business, there are no restrictions on who can form a corporation. However, if a corporation decides to elect for S Corporation status, there are several restrictions placed on who can become part of the organizations ownership.
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What are the tax implications?
One of the most common reasons that business owners elect to form an S Corporation is that the structure is eligible for pass-through taxation. Under this special tax status, the corporation is never taxed on its income. Instead, each individual owner is taxed on the company's profits and losses, as they are distributed and reflected on their personal income tax returns.
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Are there a required number of individuals needed to form an S Corporation?
Most states only require one director in order to start an S Corporation. However, some states impose a minimum number of directors based on the number of shareholders the company has. This required number is typically never lower than three and there is no maximum limit.
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Is an attorney required during the filing process?
An attorney is typically not required when starting a business. A business filing service such as Free Your Mind Services can help you streamline the formation process, and save you a great deal of time, effort, and money. However, if you are unsure of which business structure may be right for you, or you have questions regarding specific tax or organizational issues, it may be advisable to speak with an attorney or accountant.
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Do all S Corps need a Registered Agent?
All formal business entities, including S Corps, are required to have a Registered Agent on file with the state at all times. The agent may be an individual or company with a physical address located in the state of incorporation. Agents must be available at all times during standard business hours. The role of a Registered Agent is to receive any and all of communications from the government to the business. The agent’s name and address must be disclosed as part of the company’s public record.