Understanding S Corporations

Do you understand it? Do you have it? Or a better question, do you know what it is? Let us start with understanding an S Corp. An S Corporation is a business corporation that elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. “S” represents a small business corporation that is made an election under Article 1362(a) to be taxed as an S corporation. When a company chooses this option, they have decided to be taxed under Subchapters S of Chapter 1 of the internal revenue code. I know this is a lot of information to consume and can also be a bit confusing for someone just starting their small business. Here is a way to better understand S Corp. When starting a business as a sole proprietor you have a few options, however, two major ones are S Corporation and LLC (Limited Liability Company). Do you know if you are declaring your business as an S Corp or an LLC? If you declare your business as an LLC, you are not responsible for more than your investment in the company. S Corp, as well as LLC’s, assure that you do not have to pay both corporate and personal taxes. With an S Corp, the owner pays their salary through the business. While an LLC, on the other hand, is a pass-through entity, this means all expenses and income are placed on the owner’s personal tax return. Unlike an S Corp, an LLC is easier to file and requires less hassle. Although this can seem like the biggest plus it also must be understood that it also means you are required to make quarterly taxes for your business. A business owner also needs to make sure they have a distinction between their business and their personal funds while operating as a limited liability corporation. With an S Corp, you’re provided tax benefits, and employees are paid a salary. Once the salaries have been paid, and tax deductions have been met, the owner receives the remaining profits. This could be considered a good option, however, with S Corporations there is a lot more effort. To have an S Corporation in the United States, you must be a U.S Citizen. You can’t have more than 100 shareholders and forming an S Corporation costs more money than an LLC. There is also the possibility of additional state tax fee’s when having an S Corporation. Ultimately you must go the route that seems best for you and your business.