S corporations are a popular choice among business owners, but what exactly is an S corporation?In this blog post, we’ll explain what S corporations are, how they work, and the benefits of forming an S corporation for your business.
What Is an S Corporation?
An S corporation is a type of corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code. This means that the corporation doesn’t pay federal income tax, but instead, the income is passed through to the shareholders and is taxed on their individual tax returns.
To qualify for S corporation status, a corporation must meet certain criteria. Firstly, it must be a domestic corporation, meaning it is incorporated in the United States. Secondly, it can have no more than 100 shareholders, who must be individuals, estates or certain trusts. The corporation can have only one class of stock, and it must operate under a calendar year.
Benefits of S Corporations
As mentioned earlier, in an S Corporation, income is passed through to shareholders and taxed on their individual tax returns, so the corporation itself doesn’t pay federal income tax. This means that the business owner can avoid double taxation, where the corporation pays taxes on its profits and the shareholder pays taxes on the dividends they receive.
Another benefit of an S corporation is that it provides liability protection for its shareholders. Similar to a C corporation, shareholders in an S corporation are not personally liable for the corporation’s debts and liabilities. This protects their personal assets from being used to pay the corporation’s debts if it was to face any financial difficulties.
In addition, S corporations can be more attractive to potential investors as they offer the same limited liability protection as a C corporation, but the ongoing tax obligations are less complex. This could make your business more attractive to investors as they do not want to worry about the additional tax implications that come with owning a corporation.
Due to the strict eligibility requirements outlined by the Internal Revenue Service (IRS), only certain businesses can operate as S corporations. However, if your business meets those requirements, then forming an S corporation can provide a great deal of benefits and protections.
Wrapping It Up
In conclusion, if you’re considering starting a business or reorganizing your existing business, it is worth considering an S corporation. Not only can it help reduce your tax liability, it also protects the personal assets of its shareholders and provides more attractive investment opportunities.
However, as mentioned, there are strict eligibility requirements that must be met before forming an S corporation, so it’s important to seek advice from a legal or financial professional before deciding what is best for your business.
La Senda Enterprises: Tax Preparation and More
Need help choosing the right business structure? From income tax preparation to bookkeeping, at La Senda enterprises we offer a full range of professional services designed to make your life easier.
We are located in Rancho Cucamonga, California, and serve clients all over the Golden State and beyond. Get in touch today by email at info@lasendaenterpriseinc.com or by phone at 909-466-5522.