Ownership and Taxation of S Corporations
An S corp can be owned by individuals who are U.S. citizens or permanent residents and certain trusts and estates, but not by business entities such as C corporations and partnerships. S corporations file IRS Form 1120S, and profits, losses, deductions, and credits pass through the entity level without corporate taxes.
Foreign Ownership and Taxation
A “foreigner” can own an S-Corp, but it depends on what type of foreigner. A non-resident alien is an individual who is not a US citizen or a US resident alien. A foreigner that is a US resident alien can own an S-Corp.
Tax Structure and Legal Status
An S corporation provides limited liability protection but also offers corporations with 100 shareholders or fewer to be taxed as a partnership. In some instances, a business may be both an LLC and an S-corporation.
Taxation and Business Structure
Instead, an S-corporation’s profit is allocated to its shareholder(s) and taxed at the shareholder level. In general, single-member S corporations are legal. A sole proprietor may choose to incorporate his business as an S corporation. Unlike a C corporation, S corporation profits pass through the corporate entity; the shareholders report the income on their tax returns.
Taxation and Benefits
S corps are pass-through entities, meaning you file business and personal taxes together. The company files an annual information return on Form 1120-S, but business income is taxed on the shareholders’ individual tax returns.
Three significant benefits accrue to an S corp: no double taxation, shareholder-employee status, and the net operating loss deduction. S corporations, like sole proprietorships and partnerships, are pass-through entities, meaning business income is taxed on the owners’ personal tax returns.
Legal Differences and Tax Implications
The two largest differences between S corporations and sole proprietorships are the tax structure and legal liability. Because the S corporation can exist as a separate legal entity, the corporation itself may protect the owner/shareholder from certain legal liabilities.
Professional Options and Taxation
Most states allow professionals to opt for an S corporation, professional corporation (PC), or limited liability company (LLC). The IRS categorizes professional corporations as C corporations. They are considered taxpayers and must pay income taxes at the corporate rate.
Pass-Through Tax Structure
The most defining characteristic of an S-corp is its so-called “pass-through” tax structure. S-corps are exempt from a federal corporate income tax.
Creating an S Corporation
If you don’t want to pay corporate tax on company earnings, an S corp structure will allow you to pass those obligations onto shareholders and save money.
The first step you must take is to fill out and file a form for articles of incorporation with your secretary of state’s office. An S corporation allows a corporation to avoid paying federal income tax at the corporate level. Instead, the profits and losses of the business pass through to the shareholders, who report them on their personal tax returns.
Employment in an S Corporation
Can you run an S corp by yourself?
In principle, an S corporation can have no employees. However, payments to officers may be wages.