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What Is an S Corporation and Why Use One?

Business
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Tax rates and paying taxes seem to consume our minds for very good reason – the U.S. Tax Code is complicated. A common area of confusion for some small business owners surrounds the topic of an “L.L.C. (Limited Liability Corporation) versus an S Corp”. Many people, to their detriment, use these terms interchangeably. THESE TERMS ARE NOT ONE AND THE SAME. 

An L.L.C. is a formal business structure that, when used correctly, provides protection for the business owner’s personal assets by separating personal and business activities. An S Corp is a type of tax classification that can be used by both corporations and LLCs and has the potential to save some business owners money while positioning their business for growth.

Corporations are normally taxed at the corporate entity level, but an S Corporation is not. S Corporations instead elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. This pass-through means that all financial considerations are assessed at the individual income tax rates of shareholders and a benefit is that the S Corporation can therefore avoid double taxation on corporate income.

To qualify as an S Corporation, the company must not have more than 100 shareholders, must be a US company, must be meet certain shareholder qualifications and cannot be what is considered an ‘ineligible corporation’ under the law. If the company meets all the requirements, the corporation must submit Form 2553 no more than two months and 15 days after the beginning of the tax year the S Corp election is going take effect (IRC 1362(b)).

The S Corporation election may be of great benefit if you are considering starting a small business, or perhaps are already a shareholder in one. However, it is important to know your options and carefully consider how to best structure your entity. 

Do you own a small business? Do you have questions on how best to structure your business or how to plan for business continuity in times of incapacity or death? Give us a call (972) 945-1610 or comment below.

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