Selecting an S Corporation for a new business venture requires and analysis of the pros and cons of the entity relative to your specific circumstance and needs, therefore, we have assembled a brief Q&A regarding the essentials related to the choice of a C Corporation.S Corporation FAQs
- What is an S Corporation?
- What are the main differences between a C Corporation and an S Corporation?
- Should I elect S Corporation status?
- What forms are required to form an S Corporation?
- What is pass-through taxation?
- What is the organizational structure of an S corporation?
- Where should I incorporate my business?
- Is an S Corporation required to have a registered agent?
- What do I need to do after I form my S Corporation?
- Can the personal asset protection provided by forming an S Corporation be taken away?
- Can an S Corporation own an LLC?
- What is the cost of setting up an S Corporation?
S Corporations are general corporations formed under the laws of a particular state and are subject to the laws and regulations of that state. S Corporation status is an election made with the Internal Revenue Department to have the corporation’s income and expense taxed to the owners, canned “pass through” taxation Corporations allow owners to separate and protect their personal assets from the debts and obligations of the business. In a properly formed and managed S Corporation, a creditor of the S Corporation should not affect an owner's home, car, savings, or other personal assets.
Shareholders own a corporation and appoint a board of directors to oversee corporate decisions and policies. Directors typically elect officers to manage a S Corporation's day-to-day affairs. Since a S Corporation has a perpetual existence, it does not dissolve if an owner dies or leaves the business.What are the main differences between a C Corporation and an S Corporation?
C Corporations file IRS form 1120 to report corporate income to the Internal Revenue Service. The IRS taxes company profits at corporate tax rates and dividends paid to shareholders at individual tax rates. For this reason, you may hear tax professionals refer to "double taxation" of a C Corporation.
C Corporations can elect "pass-through" taxation by applying to the IRS for status as a Subchapter S Corporation. The S Corporation provides the same protection from personal liability. However, owners can report their share of profit and loss in the company on their individual tax returns. The S Corporation files IRS form 1120s to report income. Entities that have assets in excess of $10 million or file over 250 forms each year must file these S Corporation forms online.
S Corporations have a number of restrictions. Most notably, only U.S. citizens or permanent residents may own an S Corporation. An S Corporation may not have more than 100 shareholders.Should I elect S Corporation status? What are S Corp benefits?
The benefits of forming an S Corporation include:
- less risk from government audits, compared to a sole proprietorship.
- limited personal liability for business debts.
- ability to deduct the cost of benefits as a business expense.
- opportunity to raise additional funds through the sale of stock.
- owners can report profit and loss on their individual tax returns.
- Pass Through taxation to the owners.
Articles of Incorporation or Certificate of Incorporation, depending on the state. Elect "pass-through" taxation by applying to the IRS for status as a Subchapter S Corporation.What is pass-through taxation?
One possible tax advantage of an S Corporation is pass-through taxation. Corporations can elect "pass-through" taxation by applying to the IRS for status as a Subchapter S Corporation. The S Corporation provides the same protection from personal liability as a C Corporation. However, owners of an S Corporation can report their share of profit and loss in the company on their individual tax returns. An S Corporation files IRS Form 1120s to report income.
S Corporations have a number of restrictions. Most notably, only U.S. citizens or permanent residents may own an S Corporation. An S Corporation may not have more than 100 shareholders.What is the organizational structure of an S corporation?
The company is owned by shareholders, who elect directors. The directors set a vision and policy for the corporation and are responsible for the management of the corporation. The officers and managers hired by the directors are responsible for carrying out the vision on a day-to-day basis.Where should I incorporate my business?
Most companies form their corporations in the state in which they will primarily operate or in the state of Delaware in order to have access to its courts and business-friendly laws. Advantages of forming a corporation in your home state include:
- Typically the least complicated, if you only plan to operate the business in your home state.
- Avoid paying franchise taxes and filing annual reports in more than one state.
- Usually costs less to incorporate locally.
Many companies conduct business throughout the United States and abroad. An S Corporation with business locations in multiple states may incorporate in a single state, then register to do business in other states. This means that S Corporations must formally register, file annual reports, and pay annual fees in every state in which they conduct business.
Remember, you must separately apply for S Corporation tax status through the IRS by filing Form 2553.Is an S corporation required to have a registered agent?
Yes. State laws require all corporations to maintain a registered address with the Secretary of State in each state where they do business. The person or company located at that address, known as the Registered Agent, must remain available during all business hours. A Registered Agent receives and forwards important legal documents and state correspondence on behalf of the business.What do I need to do after I form my S Corporation?
Most states require S Corporations to file annual reports and pay franchise taxes to maintain their good standing. Failure to file annual reports and pay franchise taxes can result in fines, notices, and the inability to conduct business. You may be able to file many of these S Corp documents online. State laws require S Corporations to hold annual meetings of shareholders and directors and record meeting minutes. Owners and directors of an S Corporation use corporate minutes to reflect changes in management and important corporate activities.Can the personal asset protection provided by forming an S Corporation be taken away?
Generally the owners of a corporation cannot be held liable for the debts and obligations of the corporation. There is a Veil or limited liability around the corporate assets and business which generally cannot be pierced by creditors. However, if owners treat the corporation as an extension of themselves (sometimes referred to as "disregarding the corporation form" or Piercing the Corporate Veil”) by commingling personal and corporate funds, disregarding the corporate formalities or committing then creditors can attempt to hold owners liable for the debts and obligations of the company, often referred to as "piercing the corporate veil." The "corporate veil" can also be lost if a corporation is terminated by a state for failure to file required forms or failure to pay required fees and taxes.Can an S Corporation own an LLC?
An S Corporation can own an LLC as the single member or as a partial owner. However, only a single-member LLC can own a stake in an S Corporation. One of the tax advantages of an S Corporation is similar to that of an LLC in that both can pass their profits and losses through to their personal income tax report each year.What is the cost of setting up an S Corp?
The costs associated with setting up an S Corporation, LLC, and C Corporation are similar. However, there are other intangible factors you must take into account. Every s corporation is unique and comes with its own set of advantages and disadvantages. Among the subchapter s corporation requirements you must weigh when considering this particular status is that s corporations must file articles of incorporation, keep a record of corporate minutes, hold shareholder and director meetings, as well as allow their shareholders to weigh in with a vote concerning company decisions. S corporations can also only offer common stock to investors, making fund-raising more difficult. If you are still undecided as to the pros and cons of declaring your business an s corporation, please contact The Company Corporation to speak to someone who may be able to set you on the right path.