An LLC or Corporation can make an election with the IRS to be taxes as an S-corporation (S-corp). S-corporations are what is called a “pass-through entity” meaning that income, losses, deductions, and credits pass to their shareholders for federal tax purposes. S-corps file returns on a form called the 1120-S.
How Do I Become An S-Corp?
To qualify to be taxed as an s-corp, your business must:
- Be a domestic corporation
- Have only individual shareholders, certain trusts, and estates and those must be either US citizens or resident aliens
- Have no more than 100 shareholders
- Have only one class of stock
To convert your LLC or corporation to s-corp status you must file Form 2553. The election must be signed by all shareholders and then filed with the IRS.
Separate Tax Entity
The S-corp allows you to separate your personal tax return from your business return. This is a great benefit when trying to sell your business, procure business financing, or utilize your business return to qualify for grants or other programs.
No Corporate Tax
Unlike C-corporations that pay tax at the corporate level, S-corps avoid double taxation and allow you to pay tax on your business at your personal tax rate.
S-corporations have several money saving features. One is the ability to make yourself an employee of the company, which means you can operate an accountable plan for your car and home office, then your business reimburses you for it.
Another great feature is in many cases the dreaded self-employment tax can be reduced using a reasonable compensation amount. S-corps dividends are not subject to self employment tax.
Extra Tax Return
When you have an s-corp, you must file both a corporate return and an individual return. That means you are paying more for accounting services or tax software. The s-corp tax return can be difficult to prepare and usually requires the help of professionals or specialized software.
What the S-corp pays the owners in compensation directly effects the self employment tax amounts. Our example above may not apply if your salary needs to be higher because of time worked or specialized training required to perform your work.
One Class Of Stock
S-corporations are only allowed 1 class of stock. This means each shareholder has voting rights, profit rights, and can control the company based on stock.
Some companies, especially real-estate holding companies or family partnerships require multiple classes of stock, meaning the S-corp is not a good fit for those types of operations.
How We Can Help You
During your free evaluation, you can speak to one of our S-corporation Specialists. During your meeting you can get answers to all your questions and we will evaluate your business using the following factors:
⊕ Business type and shareholder profile ⊕ Probable reasonable compensation
⊕ Business size and saving opportunity ⊕ Deductions you are not utilizing
⊕ Overview of compliance needed ⊕ State issues or concerns
S-Corporation Setup & Education
One Time Fee
S-Corporation Setup (Form 2553)
Guide: Maintain Liability Protections
New Corporation Checklist
Quick & easy chat with one of our S-Corporation specialists to help you decide if an S-Corporation is right for you. We can review what you need to do to make the switch for your business & answer any questions you may have.