An S Corporation (S-Corp) is a corporation, limited partnership or limited liability company (LLC) that has made a special “S” election with the IRS. Like LLCs and C Corporations (C-Corps), S-Corps provide their owners with personal liability protection. The S-Corp, like the LLC, is a pass-through entity for federal taxes. Basically, that means that the taxable profits or losses for the business are passed through to the business owners, who record these as part of their personal tax filings.
There are other things to like about S-Corps: ownership can be easily transferred through the sale of stock, business expenses are deductible, and, like C-Corps and LLCs, S-Corps are seen as more legitimate to the general public than a sole proprietorship or general partnership. There are important restrictions to point out for S-Corps though. S-Corps are limited to just 100 shareholders, making it difficult if you’re considering expanding your company to a larger market with bigger investors down the road. Also, S-Corps can only be owned by U.S. citizens or residents. So once again, depending on where you want to expand and who may be an investor, you will want to keep this limitation in mind. Lastly, S-Corps must be owned by individual shareholders and cannot be a subsidiary of some other type of business entity.
Are you correct in assuming that your company should be an S-Corp? It’s best to find that out before actually forming one!
Get approved the first time
It’s helpful to have a professional double-check the materials you’re submitting to your given state. Forgetting something will only delay your ability to be protected from personal liability, plus some formation applications are non-refundable.
S Corporation lawyers who assists you during formation will have greater familiarity of your company and its needs going forward, than a lawyer you’re forced to hire when something goes wrong.
Should I form a C-Corp or an S-Corp?
It’s hard to say without knowing specifics on your company. Given the restrictions that come along with an S-Corp, a C-Corp offers a bit more flexibility when starting a business. A C-Corp is a standard corporation whereas an S-Corp has a special tax status assigned to it by the IRS. Both types of corporations offer limited liability protection, have similar structures, corporate formalities, and both are considered separate entities. However, despite their similarities, they have distinct differences.
C-Corps are separate taxable entities and are subject to double taxation. Conversely, S-Corps are pass through entities and pay no corporate income tax. As a result, taxes are paid at the individual level. S-Corp restrictions include no more than 100 shareholders and they must be U.S. citizens or residents. They can also not be owned by other corporations, LLCs, or partnerships. Finally, S-Corps can only have one class of stock while a C-Corporation can have multiple classes. Interested in a S-Corp? Check out more.
Where should I form an S-Corp?
If your company isn’t a big operation or operates in a small area, it’s probably okay to incorporate in your home state. For other larger S-Corps, some of the most popular states to incorporate include Delaware, Nevada and Wyoming. If your company incorporates in a foreign state then it’s crucial to abide by rules governing “foreign qualification.” This is when states require S-Corps to pay additional taxes and fees for conducting business in state that it is not incorporated in.
What’s limited liability protection?
It’s the biggest reason why people choose to incorporate their businesses. It provides owners protection from their personal assets against creditors’ claims. As long as the owners truly treat their business as a separate entity, they retain such protection.
What’s an EIN?
It’s the Internal Revenue Service’s (IRS) way of identifying businesses for tax purposes. For federal income tax purposes, a C-Corp is recognized as a separate taxpaying entity.
What’s a registered agent?
A business or individual designated to receive service of process when a business is a party in a legal action or when the state attempts to communicate with the company. Some states, like Delaware, require entities registered within its jurisdiction to maintain an in-state registered agent.
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