WHAT ARE S-CORPORATIONS?
An S-Corporation, or an S-Corp, is a legal entity, just like traditional corporations. But, unlike a traditional C-corporation, an S-Corporation is taxed under Subchapter S (hence the name) of the Internal Revenue Code ("IRC"). It is a unique business structure that combines the limited liability protection of a corporation with the tax benefits of a partnership. In this short article, we will dive into the key features of S-Corporations and what makes them different from other types of corporations.
If you are looking to form an S-Corporation to run a new business or startup venture, or for an existing business in New York or in Los Angeles or Ventura County, California, I can help you determine whether an S-Corporation is an advantageous business structure for you, or help you transition from a sole proprietorship or another structure into an S-Corporation. I can also help you change the state of formation ("re-domicile") of a corporation, limited liability company or other business entity.
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Key Features of an S-Corporation
The following are some of the more important features of an S-Corporation. Of course, this is not an exhaustive discussion, and there are other corporate features that can be discussed, and much more can be said about each of these. But, this is a "high-altitude" view of several key features that should be known by a small business owner considering forming an S-Corporation.
Limited Liability Protection
S-Corporations provide their owners, also known as shareholders, with limited liability protection. This means that the shareholders' personal assets are not at risk in case the company incurs debt or is sued.
One of the biggest advantages of an S-Corporation is that it is a pass-through entity, meaning that the business itself is not taxed on its income. Instead, the profits and losses are passed through to the shareholders and are only taxed on their personal tax returns. This can result in significant tax savings for the business and its owners.
To be eligible to form an S-Corporation, the business must meet certain criteria set forth by the IRC. The business must be a domestic corporation, must have no more than 100 shareholders, and all shareholders must be individuals, estates, or certain trusts. Additionally, the business may not have any foreign shareholders or partnerships as owners.
Limited Deductible Losses
One of the limitations of S-Corporations is that the deductible losses are limited to the basis of the shareholder's stock and debt in the company. This means that if the shareholder's basis is exhausted, any additional losses cannot be used to offset other income on the shareholder's personal tax return.
Annual Reporting Requirements
S-Corporations are required to file an annual tax return (Form 1120S) and provide their shareholders with a Schedule K-1, which shows the shareholder's share of the company's income, deductions, and credits. This can result in additional paperwork and compliance costs for the business.
An S-Corporation is a unique business structure that provides limited liability protection and pass-through taxation. It is an attractive option for small businesses and start-ups looking to save on taxes and protect their personal assets. However, it is important to consider the eligibility requirements, limited deductible losses, and annual reporting requirements before deciding if an S-Corp is the right choice for your business.
If you need to incorporate a business and want to know about your options, do it properly. I would love the chance to get to know you and your business, for you to consider me a professional resource to help you form your corporation and maintain corporate formalities compliance obligations, so you can focus on growth and executing on your business strategies. Click here to make an appointment now for a free consultation, or call me at 310-567-5966 (California), 212-414-5966 (NYC) or 888-774-1474 (Toll Free) to schedule a Free Consultation.
This article is not legal advice, but is provided for general information purposes only: see the disclaimer in the footer of this site, and read Legal Notices here.