What’s an S Corporation?

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If you’re a new business owner, you probably know that in the very near future, you’re going to have to register your business with both your state government as well as the Federal government. Since the government is involved, there must be some degree of complication and that is true when going through this process. There are a lot of options available but let’s look at what an S Corporation is and why you would want to register using this designation.

For most small businesses, forming an LLC will work well. By it’s nature, an LLC combines some of the benefits of a corporation with the simplicity of a partnership and with the help of a business registration service, it is easy to set up with very little paperwork.

An S Corporation is similar to an LLC but is more appropriate for larger businesses with a more complicated management structure. With an S Corporation, you have to file articles of incorporation, write bylaws, elect a board of directors, hold board meetings, issue company stock, and change the governance structure only by board vote. Your company can also have up to 100 shareholders if you’re designated as an S Corporation.

S Corporations maintain many of the same advantages of an LLC including pass through income and limited liability.

Pass Through Income

You don’t want to pay taxes twice. With some businesses, when money comes in, the business has to pay taxes and when it pays an employee, the employee must be taxes on their personal returns. If you are the owner and one of the employees of a small business, if it weren’t for pass through income you would have to pay both of those tax bills. Pass through income allows you to claim the income only once on your personal tax returns in most cases.

Limited Liability

When you form an LLC or S corporation, your business becomes a person with all the rights that a human enjoys. (Legally speaking) Your business can do well and earn money to pay employees but it can also do wrong and be the subject of a lawsuit. Limited liability means that each shareholder in the S Corporation is only liable for the money they invested providing the company has operated in compliance with S Corporation rules.

In order to be an S Corporation, the IRS mandates that you meet the following requirements:

  • Your company must be a United States based entity.
  • Your shareholders can only be individuals, certain trusts or estates and may not include partnerships, other corporations or non-resident shareholders.
  • You can only issue one class of stock. This prevents you from setting up different types of ownerships.
  • Your business must be an eligible type. Certain financial institutions, and insurance companies are two of the types of companies that may be ineligible for S Corporation designation.

If you’re still not sure, contact a business registration service. They have the knowledge and expertise to guide you through the decision making process.