First of all, what is an S Corporation? An S Corporation, or an S Corp, received its name from subsection S of the tax code. To start an S Corp, a small business owner simply forms a C Corporation then files for S corporation status with the IRS. While an S Corporation and a C corporation have some similarities, the two have differences when it comes to regulating pay and self-employment tax regulations.
Mike McVay, LLC & S-Corporation Specialist - 850-725-5696
Here are the top three benefits of forming an S Corporation:
They have Pass Through Taxation like an LLCLike an LLC, an S Corporation doesn’t pay corporate taxes. Anything made or lost is reported based off of the personal income taxes of the business owner’s. As a result, this avoids the double taxation that C Corporations have to put up with. Since net losses are also passed through, the shareholder can reduce his tax liability by counteracting other income with any losses from the S Corporation. There is an important caveat however: any shareholder who works for the company must pay him or herself reasonable compensation. Basically, this means that the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as “wages.” Additionally, the owners of an S Corporation are considered employees of the company, not owners. So the “owners” of an S Corp get to skip out on the self-employment taxes that members of an LLC would have to pay.
Plan Ahead with Reduced Taxable GainsIf you open your business with the intention to sell it at some point, then the S Corp might suit you perfectly. When you finally want to sell your business, your taxable gains from the sale may very well be less than if you were selling a C Corporation instead of your S Corporation. Not everyone wants to close their business, but when they do want to, or have to, it’s always nice to walk away with some money.
They have an Unlimited LifespanIf you do indeed plan on making sure your business sticks around for a while, the S Corporation works in your favor as well. Unlike an LLC, S Corporations have an unlimited life span. Your business will continue to exist even if you leave as the owner. The business can continue operating without too much trouble or upkeep. However, say you have the best intentions to run your own business and stick with it through the years, through thick and thin, but something comes up and you have no choice but to transfer ownership. In some forms of incorporating, this can mean a lot of hassle. Though with an S Corporation, ownership can be easily handed over by selling the company stock.
Additionally, if after a while you think an S Corporation isn’t for you after all, that maybe you’d like to stick with a C Corporation, you can easily drop the S Corporation status with the IRS at any time.
McVay Business Services - 850-725-5696 - Pensacola LLC & S-Corporation Specialist