What is it: First, it should be noted that an S Corp is not really a corporation. Rather, it’s a corporate entity, such as a Limited Liability Company or C-Corporation that made the election to be treated as an S Corp for tax purposes. S Corporations are state entities that have elected to be taxed differently. Meaning, instead of the tax method they would have been subjected to before, they have elected to be taxed as a “flow through” or “pass through” entity. As described above, this means that the profits “flow through” the corporation and are taxed at your personal income tax rate. This way, you avoid double taxation. There are several restrictions and requirements associated with an S Corp. For example, the corporation must be domestic, have no more than one hundred shareholders, have once class of stock, etc.
Similar to the C Corp., as an S Corporation, the directors, officers, shareholders, and employees enjoy limited liability protection.
How to form an S-Corporation: In order to form a C-Corporation, you must choose a business name, file articles of incorporation (or articles of organization if you’re opening an LLC with the intent of later electing as an S Corp) with the department by one or more persons, and issue stock certificates. Lastly, and most importantly, you must elect to be treated as an S Corporation within two months and fifteen days (75) days from the formation of your entity. If you miss this deadline, there are ways to rectify the problem by filing for late application or waiting for the next tax year and electing to be treated as an S Corporation.
Tax implications: Unlike C-Corporations you will NOT be subjected to “double taxation.” Rather, you will only be taxed on your personal income at your personal income tax rate. S Corporations have many tax advantages due to their unique nature. For example, as a “self-employed” individual, you must pay the IRS roughly 15% self-employment tax. However, that tax is only applied to wages. With an S-Corp., you can designate some money as wages and some as leftover distributive share. You do not pay self employment tax on the distributive share. So, for example’s sake, say you make $100,000, if you never elected to be taxed as an S Corp, you would pay roughly 15% or $15,000 of that in self employment tax. However, if you designate $50,000 as wages and $50,000 as distributive share, you will only have to pay the self employment taxes on the $50,000 earned in wages. This will result in a savings of $7,500! There are many other tax advantages in electing to be treated as an S Corp.
To learn about the advantages and disadvantages of an S Corporation, and to see if it’s right for you, call us at (954) 613-0422.