By setting up a new business, one can face lots of issues such as choosing the right business model, hiring professional employees, and understanding a payroll schedule. However, one of the most vital choices that you have to make is deciding the future structure of your business. That’s because it is one of the most important decisions within your business which will impact everything in the long run.
Compared to other business structures such as an LLC and C Corp, S -Corporation is not so popular among entrepreneurs, whereas this business type can become a perfect decision for small business owners. The main reason is that S-Corporation provides business owners with lots of tax benefits along with legal protection for its shareholders. Keep reading our blog, and you will know all the benefits provided by this business structure. But, first of all, let’s try to understand what an S- Corporation is and what are the benefits that it provides. We suggest you read this blog which talks about the main differences between S-Corporation, an LLC and a C Corp.
In accordance with the IRS, an S-Corporation is a corporation which elects to pass corporate income, losses, credits, and deductions among the shareholders for federal tax purposes. You can find more information concerning this business structure on the IRS’s official website. But, if you want to learn how everything starts, you can also read our blog about the history of the S-Corporation.
Generally, shareholders of S- Corporations report their income and losses on their personal tax returns. Additionally, they are assessed tax at their personal tax rates, which allows them to avoid double taxation.
If you decide to apply for S-Corporation status, your business has to meet the following requirements:
- Having a status of domiciled in the United States
- Having less than 100 shareholders
- Including individuals, certain trusts and estates
- May not include partnerships, corporations and non-resident alien shareholders
- Having solely one class of stock
- Not being an ineligible corporation
- Submit form 2553 Election, signed by shareholders of the company
Taxes That S-Corporation Liable For?
If you decide to set up your business as an S-Corporation, then you should be aware of several tax laws concerning this business structure:
- Income Tax: Compared to other corporations, the S-Corporation is exempt from federal income tax. That’s because taxes are not paid at the corporation level; instead shareholders of an S-Corporation have to report it on their tax returns. So, they will be taxed at their individual income tax rate.
- Estimated Taxes: In that case, if the amount of your income tax is withheld from your personal salary, it is not the best option. However, if you are self-employed, estimated taxes will cover not only your income tax, but also self-employment, and alternative minimum tax.
- Employment Taxes: Keep in mind that an S-Corporation requires you to pay standard employment taxes along with medical care and Social Security and Federal Unemployment taxes (FUTA).
Main Advantages of an S-Corporation!
When you are launching your business as an S-Corporation, you are provided with lots of benefits, among them are:
Self-Employment Tax: Among the main benefits provided by the S-Corp is that you avoid double taxation. Additionally, you can lower your self-employment tax.
Independent Life and Easy Transfer of Ownership: Another advantage of an S-Corporation is that the shareholders of S-Corporations can come and go, and these changes will not have an impact on your business’s operation.
Protected Business: All assets of S-Corporation’s shareholders are fully protected, so shareholders are not responsible for business’s liabilities.
After reading this blog, you now know that an S-Corporation is the best structure for creating a small business. That’s because you can confidently start on creating your business only after understanding all the benefits of S-Corporation. However, if you are not sure which business structure suits you more, then you need a professional’s help.
You can contact Prestige Auditors and we will help you choose the best business structure based on your requirements. In this case you can be 100 percent sure that you do not make a vital mistake in creating your future business. There are lots of successful companies which have started their way due to the effort of our professional team. We suggest that you visit our website, since there you can find detailed information concerning our services. Additionally, you can read lots of interesting blogs which will help you improve your operation.