When you incorporate your business, you’ll essentially have three incorporation options from which to choose: LLC, C Corporation and S-Corporation. For some businesses, electing to file for S-Corporation will be a wise choice. Specifically, this method of incorporation refers to one that is taxed as a partnership or sole proprietorship instead of a separate entity.
Not sure if making the S-Corporation designation is right for your business? There are a few things worth considering.
Benefits of Making the S-Election
There are many inherent advantages in making the S-election for your business, many of which are tax-related.
Protect Your Assets
As an S-Corporation, business owners and their partners/shareholders cannot be held personally responsible for the liabilities and debts of the company itself. This means your personal assets are generally protected, even if the business is sued.
Pass-Through Taxation
S-Corporations also enjoy pass-through taxation, which means taxes are not paid at the corporate level. Instead, earnings are reported on the shareholders’ individual tax returns, allowing for the elimination of double taxation (taxation at the corporate level and taxation on distributions to shareholders (dividends)), and taxing income at the individual rate as opposed to the corporate rate (which is generally lower).
Reduce Self-Employment Tax Liability
Because of the characterization of earnings through an S-Corporation, partners/shareholders are able to lower their self-employment tax burden while still enjoying distributions, salaries and dividends through the business itself.
Does Your Business Qualify?
There are a few requirements your business will need to meet before you can file for S-Corporation status. For starters, your business must:
- - Be a domestic corporation with no more than 100 shareholders; and
- - Have shareholders who are United States residents who fall into one of the following categories:
- individual
- estate; or
- exempt organization
- - Only offer one class of stock at all times
If you choose to file for S-Corporation status, you must file within two-and-a-half months from the start of the applicable tax year in which you’d like it to take effect. One exception to this is if you have a newly incorporated business, in which case you will have two-and-a-half months from the date of your formation.
Filing for S-Corp Status
If your business meets all the requirements for filing S-Corp status, you may be wondering where to begin.
Going the DIY Route
You can file for S-Corp status yourself by filling out and filing IRS Form 2553. Be sure to fill out the form in its entirety and be aware of filing deadlines for each tax year. You must also make sure that your business meets all the requirements for an S-Corporation at the time of filing.
Working With a Professional
Because filling out the necessary paperwork and dealing with filing deadlines can be complex, some may find it a better solution to work with a professional when it comes to file for S-Corporation status. A business attorney or incorporation service will be able to assist you through the entire process and make sure all steps are followed by the deadline, giving you additional peace of mind.
Overall, electing to file for S-Corporation status can be a smart choice for many business owners looking to enjoy tax benefits and personal asset protection. Does your business meet the S-Corporation requirements? If so, you may want get started today.
