What is S-Corporation?
When you file Articles of Incorporation at the state level you can elect:S
Corporation Status¿ with the IRS. Once the IRS approves the S status, the
corporation will be taxed like a partnership or sole proprietorship rather than as a
separate entity. What this means to you is that income is passed through the S corporation to you, a
shareholder.
Why Create an S Corporation?
A regular for-profit corporation is required to pay income tax on taxable income
generated by the corporation. As well, dividends distributed to shareholders
may be taxed as income to the shareholders.:Double taxation¿ is when the
corporation and shareholder are taxed. By forming an S corporation, you can
avoid the double tax and funnel the corporation¿s profits and losses directly
to yourself.
What Are Other Benefits of S Corporations?
Setting up an S corporation can provide you with many benefits including:
- As an owner of an S
corporation you can limit your liability.
- S corporate losses pass down
to your individual return. You can take the corporation¿s loss and use it
to reduce your personal income tax.
- S corporations don¿t pay
income taxes.
- S corporations don¿t have to
pay FICA (Medicare or Social Security) taxes on profits and dividends.
Who Should Not Create an S Corporation?
While S corporations are a great way to limit your taxes, they are not for
everyone. If you plan on reinvesting corporate income, an S corporation would
not be a good choice.
Who Is Eligible to Create an S Corporation?
In order to create an S corporation, you must meet all of the following
federal requirements:
- Corporation filed at the
state level
- No more than 75 shareholders
- Each shareholder must be a U.S.
citizen or a permanent resident alien
- The corporation issues only
one class of stock
- No more than 25% of the
corporation¿s income is derived from passive investment activities
If you are a calendar year corporation with your fiscal year ending on a
date other than December 31, you must get IRS permission before applying for S
status.
What Is Passive Income?
If more than 25% of the corporation¿s income comes from passive sources for
three consecutive years, then the IRS will revoke your corporation¿s S status.
The most common form of passive investment is real estate.
Do I Need a Lawyer?
An attorney familiar with tax laws and regulations can help you determine if
an S corporation is right for you. A lawyer can assist you with following the
detailed procedural rules needed and adhering to the deadlines for organizing
an S corporation.
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