S Corporation ? What Is It?

For many small businesses, the "S" corporation is the business entity of choice. The "S" in S corporation refers to a tax designation. All corporations are created the same way under state law. A small business must then chose a tax status, to wit, "C", "S" or non-profit. Important issues concerning S corporations are covered in this article.

C Corporation v. S Corporation

Federal tax laws automatically consider every corporation to be a "C" designation. A small business, however, may elect to be designated as an "S" corporation by filing IRS form 2553. The election must be made prior to the tax year in which it is going to be effective. All shareholders must sign the election.

A C corporation stands alone for tax purposes. It must file tax returns and pay taxes on profits. Profits and losses are reported on the corporate tax return and do not pass through to shareholders. C corporations can elect any calendar month as the end of their fiscal year.

An S corporation is a pass through entity for tax purposes. It does not file a tax return for the purpose of paying taxes, but does file information returns. All profits and losses are passed through to the shareholders. In turn, each shareholder reports the profit or loss on his or her individual tax returns in proportion to their ownership interest. For instance, if you own 30% of the total issued shares, 30% of the profits or losses must be reported on your personal tax returns. S corporations must have a fiscal year-end of December 31. If you intend to eventually take your business public, you cannot use an S corporation.

Although S corporations are a tax choice, there are limitations on what corporate entities can make the election. The biggest hurdles are:

1. There can be no more than 75 shareholders;

2. Each shareholder must be a person, not a business entity; and

3. There can be only one class of stock.

Benefits

While S corporations provide relief from the tax filings of a C corporation, there are negative aspects to using them. Simply put, a C corporation can write off more expenses. S corporations may not be able to deduct certain types of insurance and costs of doing business. The list is fairly complicated, so you should speak with a tax professional prior to deciding which designation works for your business.

S Corporation vs. Limited Liability Company

S corporations have a definite tax advantage over limited liability companies ["LLC"]. Distributions from LLCs to shareholders are subject to self-employment tax [15.2 percent] in their entirety. Distributions from S corporations, however, can be broken down into two categories, salaries and dividends. The dividend distributions are not subject to the self-employment tax. Avoiding self-employment tax can make a substantial difference in the amount of money you take home.

In Closing

I always laugh when someone emphatically says that every business should be formed as a particular entity. Such statements are simply wrong. The "best" business entity depends entirely on the nature of your business. In many instances, S corporations are ideal.

Richard Chapo, Esq., is a business lawyer with http://www.sandiegobusinesslawfirm.com - offering legal advice to San Diego businesses. This article is for general education purposes and does not address every facet of the subject matter. Nothing in this article creates an attorney-client relationship.

---

The Power of Why: Your Psychological Ally To Marketing Success!

Here's why 'WHY' is such a profit-making marketing trigger."Stop taking... Read More

Business Checks are an Added Cost to Your Small Business - Try Making Them Yourself!

Starting and managing a small business is no fun chore,... Read More

The Perilous Franchise Agreement: What Did You Sign?

Purchasing a franchise has become one of the most popular... Read More

Operational Aspects on P and L Statements of Mobile Services Businesses

What kinds of things effect mobile service businesses P and... Read More

Computer Related Habits From Small Business Owner - Be Prepared, Avoid Despair

Aside from the fear of losing a spreadsheet or research... Read More

Collection Agency Selection

Frankly, given the legal and regulatory requirements involved in attempting... Read More

Small Business and Branding ? Why and How?

When we speak of branding most of the time people... Read More

Franchising and Royalty Payments

If you are thinking of turning your current into a... Read More

Reaping the Rewards of Cost Cutting

In these days of insecurity and uncertain futures, the tendency... Read More

Why Small Businesses Need Both A Logo And An Identity System

Experts urge small business owners to "brand" their business ?... Read More

How to Avoid the Most Common Reasons for Small Business Failure

The life cycle of the typical small business is short... Read More

Finance Your Small Business: So Much Money, So Little Time

$37.4 million funded from venture capital today. $86.4 million funded... Read More

Tips on Setting Up Your Small Business Bank Account

One of the first things you will need to set... Read More

How To Build Business Credit

Having their own business is something many millions of people... Read More

1-2-3 Steps To A Successful Joint Venture

A successful joint venture marketing effort is the goal of... Read More

A Day in the Life of a Self Employed Professional

It's Monday morning and Connie the Consultant sits in her... Read More

Find Some Sample Payroll Check Stubs on the Net for Easy Reference

Starting a business? For many people, the bravery to venture... Read More

Dont Let Your Small Business Fall in the FDCPA Trap

When someone owes your small business money, you certainly feel... Read More

Franchisee; Vacation Managing

Do you own a franchised business? Over 400,000 franchised businesses... Read More

7 Card Tricks That Improve Your Personal Networking Power

CARD SHARK7 Card Tricks That Improve Your Personal Networking PowerThe... Read More

Power Tools for Business

How do we keep track of our business deals?If you... Read More

Entrepreneur to Employer

You make the decision to go into business and for... Read More

How to Become Successful in the Field of Financial Consultants

Financial Consultants are one of the fastest growing industries today.... Read More

Competition Relations in Auto Detailing

There is significant competition in auto detailing and car washing.... Read More

More Rules for Franchising?

The FTC- Mighty Federal Trade Commission has unilaterally decided to... Read More

Looking for a New Office Chair?

Perhaps you are building a new home office or you... Read More

Top 7 Small Business Tax Tips

Here are seven ways for owners of small businesses to... Read More

Excuses Franchisees Make; When They Violate Exclusive Territory Agreements

One of the biggest excuses franchisees of home based and... Read More

1 Overlooked Key to Small Business Success

Is this you?You dreamed of owning your own business, doing... Read More

Using Technology to Manage Customer Loyalty

Don't let your customer satisfaction research initiative collect dust on... Read More

Truck Wash Business Case Study

Often smart entrepreneurs look for out of the way businesses,... Read More

Bad Regulators Cost Small Businesses

When a regulator finds a target to go after to... Read More

Serious About Writing A Business Plan... Start A Business Plan Library

Tap these treasures of ideas. The best money you can... Read More