An S corporation allows income and losses to pass through to shareholders’ personal tax returns, avoiding double taxation compared to a C corporation. To elect S corporation status, file IRS Form 2553, which must be signed by an authorized officer.
Advantages and Limitations
Advantages:
- No corporate income tax. Income passes through and is taxed only at the shareholder level.
- Shareholders have liability protection.
- Taxation can be favorable for profits over $157,500 (single) or $315,000 (married filing jointly).
Limitations:
- Must have 100 or fewer shareholders.
- Owners must be U.S. citizens or residents.
- Can only issue one class of stock.
- Some states don’t recognize S corporation status for state taxes.
- Subject to self-employment taxes.
Consider consulting a business attorney when deciding between business entities.
Deciding on an S Corporation
Is filing as an S Corp worth it? Take a look at the table below to help you estimate how much you could expect to save.
How to Record a Stock Sale?
Step 1 is to revise the stock ledger to reflect the new ownership. A stock ledger has the information of anyone that possesses the S corporation shares.
Tax Reporting
Schedule D is where you’ll report any capital gains or losses your S corporation sustained this year.
Easier Transfer of Ownership
An S corp can transfer all of its ownership interests without negative consequences. If an LLC transfers more than half of its ownership interests, the business could be terminated.
Disadvantages of an S Corp:
Once an S corp election is approved, owners can start properly managing their finances.
The article shares helpful highlights, including the disadvantages and advantages of S corp status.
Tax Comparison: S Corp vs. LLC
- For state taxes on S Corps, every state has its own laws.
- Some don’t tax S Corps while others require income tax.
Filing Deadlines
A corporation or LLC must file an S-Corp election within two months and 15 days (~75 days total) of the date of formation for the election to take effect in the first tax year.
Forming an S Corp
To operate your business as an S Corp, you must initially file your company as a regular corporation (C Corp) in your selected state of incorporation.
Tax Classification
An S-corp is a type of corporation that elects to pass corporate income, loss, deductions, and credits to its shareholders.
If your business makes a lot of money, having an S Corp could help you qualify for the tax break of the century.
S Corp Taxation
- S corps should be abolished altogether. According to the IRS, only 4% of all corporations are S corps, yet they account for 60% of all corporate tax returns.
But as an LLC/S Corp, you can pay yourself a somewhat modest salary, but the rest of your income is taken as a profit, which is taxed at a lower rate.
S Corp Reporting
Though there are many benefits to operating as an S Corp, you have more responsibilities than an owner of a sole proprietorship or partnership. S corporations must file reports every year with their state showing profits and losses.
Do Chapter Sub S Corps File Personal Tax Returns? S corporations are required to file annual tax returns.
An S corp is a regular corporation that has elected "S corporation" tax status, allowing shareholders to pay income taxes as if they’re a sole proprietor or a partner in a partnership.