An S corporation (S corp) is a type of small business corporation that is taxed differently from a traditional corporation (C corp). S corps are able to pass income, losses, deductions, and credits through to their shareholders, who are then taxed on their personal tax returns. At Padgett, we provide reliable tax and accounting services to small businesses nationwide, including to S corporations. In this article, our small business tax advisor provides an overview of everything that you need to know about S corps.
As defined by the Internal Revenue Service (IRS), S corporations (S corps) are companies that “elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.” In other words, S corps are taxed as a pass-through entity. In that way, they are similar to partnerships and sole proprietorships. Notably, the profits and losses of the business are passed through to the shareholders. The shareholders are taxed on these gains/losses on the personal return. This type of setup avoids the double taxation that can occur with traditional corporations (C corps). S corps are popular with small businesses because they offer liability protection and the potential for tax savings. Shareholders of an S corp have limited liability, meaning their personal assets are protected in the event that the company is sued or incurs debt.
To form an S corporation, you will need to follow the same basic steps as you would to form a traditional corporation (also known as a C corporation). This typically involves choosing a business name, filing articles of incorporation with your state's business registration agency, and obtaining any necessary licenses or permits.
In addition to these basic requirements, there are several specific steps that you will need to take to form an S corporation. First, you will need to ensure that your business meets the eligibility requirements for S corporation status. To qualify as an S corporation, a business must be a domestic corporation with no more than 100 shareholders, and all shareholders must be individuals, certain trusts, or estates.
As noted previously, the shareholders of a corporation are liable for taxes related to the gains and losses of the company. Earnings “pass through” the S corporation itself directly to the shareholder. In contrast, the S corporation itself does not pay federal income tax on its business income the way that a C corporation does. An S corporation is typically not liable for taxes—the taxes will be the responsibility of the individual shareholder. Still, there are tax form filing requirements for both S corporations and the shareholders of S corporations.
Here are key tax forms for S corps:
Here are important tax forms for the shareholders of S corps:
Are you considering forming an S corporation for your business? In many situations, it offers a sensible and cost-effective choice. Of course, as with any type of business structure, S corps have both advantages and disadvantages that you should consider before deciding to form one. Here is an overview of some of the pros and cons of setting up an S corp:
Advantage (Tax Savings):
One of the primary advantages of an S corp is the potential for tangible tax savings. As S corps are taxed as pass-through entities, their profits and losses are passed through to the shareholders and reported on their personal tax returns. This can result in tax savings, especially for businesses with significant profits.
Advantage (Liability Protection):
Another advantage of an S corp is the liability protection it provides for its shareholders. Shareholders of an S corp have limited liability, meaning that their personal assets are protected in the event that the company is sued or incurs debt. This is a significant advantage over other business structures, such as sole proprietorships and partnerships, where the owner's personal assets could be put at risk.
Disadvantage (Start-Up/Maintenance Cost and Complexity):
One notable disadvantage is that S corps are generally subject to more legal requirements and paperwork than other business structures, including sole proprietorships, LLCs, and partnerships. S corps may be more expensive to set up and maintain than other business structures, due to the fees associated with forming and registering the S corp and the ongoing costs of compliance.
Overall, S corps can be used to structure any type of business that meets the eligibility requirements for S corporation status and wants to take advantage of the liability protection and tax benefits offered by this business structure. Some examples of businesses that operate as S corps include:
Navigating business tax issues is complicated—especially for the owners and operators of S corps. You do not have to take care of all of your tax issues alone. At Padgett, we are devoted to helping S corporations with the full range of business tax matters. We are proactive and reliable. Among other things, our small business tax professionals for S corps are prepared to:
At Padgett, our network of small business tax professionals has empowered a nation of entrepreneurs. We are committed to providing top-quality, reliable tax guidance for small businesses. If you have any specific questions or concerns about small business issues for an S corporation, we are more than ready to help. Give us a call now or contact us directly online to set up a fully confidential, no-commitment initial consultation.
