An S Corporation is a corporation that meets the necessary requirements to be taxed under the Subchapter S of the U.S. Internal Revenue Code. By optioning for an S Corporation status, the corporation agrees to divide their yearly profit or loss equally among the shareholders based on each shareholder’s stock in the corporation. Most often this decision is made to benefit the corporation by reducing tax liability and generating capital. There are several advantages of an S Corporation that make this the perfect method for many businesses.
One of the biggest advantages of an S Corporation is the reduction in tax liability for both income tax and payroll tax. S Corporations do not pay any federal income tax for the business because the profits or losses are distributed to the shareholders every year. It is the shareholder who in turn must record their specific profit or loss on their individual income tax return. This is a huge benefit over a C Corporation, where both the corporation and the shareholders are required to report profit and loss on their tax return.
S Corporations are also able to save money on payroll taxes because they do not have to pay any payroll taxes on employees who are also shareholders. This can greatly reduce their payroll tax liability since they will only have to pay taxes if they have employees who are not shareholders. This reduction of the payroll tax burden in addition to time saved by not needing to calculate and distribute payroll taxes are other great advantages of an S Corporation.
When just starting a corporation, securing the necessary amount of capital can often prove to be difficult. This is another advantage of an S Corporation because these corporations are made up of a maximum of one hundred shareholders. The money collected through the selling of these shares will generate capital for the corporation. Another one of the advantages of an S Corporation is that is allows for limited liability protection because creditors cannot seek payment from shareholders. Creditors will be limited to only going after the corporation’s assets.
In order to become incorporated as an S Corporation, the company must meet certain IRS requirements. The corporation must first be an eligible entity like a domestic corporation and limited liability corporation. They are also limited to selling only one class of stock to a maximum of one hundred shareholders. All of the shareholders must be United States citizens or legal residents. If they meet all of these requirements, they can file for incorporation with the IRS. If any company is considering becoming incorporated, they should first consider all of the advantages of an S Corporation.