What Is An S-Corporation?

When starting a business, it is important to explore different entity types, because it can make a difference in how much you pay in taxes, and how to handle profits. An S-corporation or S-Corp is a corporation that is similar to an LLC or Limited Partnership, but an S-Corp allows for a business to deduct business expenses from taxable income. CPA Financial Architects can help guide your business in the right direction, and help you understand what business model is your best option.

An S-corporation is a form of corporation that meets Internal Revenue requirements. The “S” refers to an IRS code section, in which a company with 100 or fewer shareholders can benefit like a corporation while being taxed as a partnership.

The S-corporation avoids double taxation. Shareholders will be taxed on an individual level instead of at the corporate and individual level. Not every business qualifies to be taxed as an S-corp. The requirements for electing this type of entity include being a domestic corporation, having fewer than 100 shareholders, and only one class of stock.

Starting a Sub S Corporation

As a business owner, it is imperative to form credibility with customers, employees, and investors. The S-corporation allows an owner to show their commitment to the company. Saving money on corporate taxes can be a lifesaver when starting a new business – an S-corporation does not pay federal taxes at the entity’s level.

An advantage to filing as an S-corporation allows shareholders to be company employees who earn salaries and receive corporate dividends that are tax-free. Corporations that file taxes under Subchapter S can pass their business income, losses, and deductions to shareholders.

S-Corporation Example

Say your business has elected to file as an S-corp, and your gross salary is $100,000. You can report your $50,000 salary as a business expense, and now you have $50,000 in profits. The business still reports the full gross income, but you will only pay Social Security and Medicare taxes on the $50,000 salary.

S-Corp vs LLC

In contrast, operating as a Sole Proprietor entity or LLC, all of that $100,000 gross income must a be reported, but only $25,000 can be reported as a business expense. Now you will pay taxes on the $75,000 salary.

S-Corporation Advantages

• Unlimited number of management and shareholders
• Flow-through taxation – shareholders are only taxed on profits at an individual level
• Privacy Protection
• Great for businesses that provide a service

Another great benefit to filing as S-corp is that shareholders do not have to pay self-employment tax on the profits of the business – they will only be taxed on the salary they pay themselves. Your business can start taking advantage of this benefit once the S-corp is making enough that there are profits to be paid after paying the shareholder a “reasonable compensation.” It’s mandatory that each owner who is an employee must be paid a reasonable amount of compensation.

Changing to An S-Corporation

It’s essential to consider whether changing to S-corp status will save your business money. The IRS analyzes owner and shareholder salaries; so do not set an artificially low number when considering this type of business entity. If you do not think there will be any profit, S-corp might not be helpful.

Consider starting your business as an S-corporation to take advantage of the flow-through losses. If at any point you want to take your business public, you can. Converting to a C-corporation can be done at the beginning of a new tax year.

In order to become an S-corporation, according to the IRS, a business must submit Form 2553 Election by a Small Business Corporation. All shareholders must sign this.

S Corp Accountant Near Me

The knowledgeable team at CPA Financial Architects is ready to offer the best advice and options to future business owners. New corporations are often at a loss when it comes to taxes. The continuous change of tax laws can often leave owners confused. We strive to stay on top of all changes, to keep you well informed.

If you are considering filing as an S-corporation, our team of certified public accountants in the Las Vegas area, will consult with your team and go over all options. Counsel is important. Book a consultation with us today.