| For many small businesses, the "S" corporation is the | | | | Although S corporations are a tax choice, there are |
| business entity of choice. The "S" in S corporation | | | | limitations on what corporate entities can make the |
| refers to a tax designation. All corporations are | | | | election. The biggest hurdles are: |
| created the same way under state law. A small | | | | 1. There can be no more than 75 shareholders; |
| business must then chose a tax status, to wit, "C", "S" | | | | 2. Each shareholder must be a person, not a business |
| or non-profit. Important issues concerning S | | | | entity; and |
| corporations are covered in this article. | | | | 3. There can be only one class of stock. |
| C Corporation v. S Corporation | | | | Benefits |
| Federal tax laws automatically consider every | | | | While S corporations provide relief from the tax filings |
| corporation to be a "C" designation. A small business, | | | | of a C corporation, there are negative aspects to |
| however, may elect to be designated as an "S" | | | | using them. Simply put, a C corporation can write off |
| corporation by filing IRS form 2553. The election must | | | | more expenses. S corporations may not be able to |
| be made prior to the tax year in which it is going to be | | | | deduct certain types of insurance and costs of doing |
| effective. All shareholders must sign the election. | | | | business. The list is fairly complicated, so you should |
| A C corporation stands alone for tax purposes. It must | | | | speak with a tax professional prior to deciding which |
| file tax returns and pay taxes on profits. Profits and | | | | designation works for your business. |
| losses are reported on the corporate tax return and | | | | S Corporation vs. Limited Liability Company |
| do not pass through to shareholders. C corporations | | | | S corporations have a definite tax advantage over |
| can elect any calendar month as the end of their fiscal | | | | limited liability companies ["LLC"]. Distributions from |
| year. | | | | LLCs to shareholders are subject to self-employment |
| An S corporation is a pass through entity for tax | | | | tax [15.2 percent] in their entirety. Distributions from S |
| purposes. It does not file a tax return for the purpose | | | | corporations, however, can be broken down into two |
| of paying taxes, but does file information returns. All | | | | categories, salaries and dividends. The dividend |
| profits and losses are passed through to the | | | | distributions are not subject to the self-employment |
| shareholders. In turn, each shareholder reports the | | | | tax. Avoiding self-employment tax can make a |
| profit or loss on his or her individual tax returns in | | | | substantial difference in the amount of money you |
| proportion to their ownership interest. For instance, if | | | | take home. |
| you own 30% of the total issued shares, 30% of the | | | | In Closing |
| profits or losses must be reported on your personal | | | | I always laugh when someone emphatically says that |
| tax returns. S corporations must have a fiscal | | | | every business should be formed as a particular entity. |
| year-end of December 31. If you intend to eventually | | | | Such statements are simply wrong. The "best" |
| take your business public, you cannot use an S | | | | business entity depends entirely on the nature of your |
| corporation. | | | | business. In many instances, S corporations are ideal. |