S Corporation Info

Tuesday, November 01, 2005

S Corporation status is often beneficial to small business owners for several reasons. One of the biggest advantages of an S Corporation over a C Corporation is that it avoids double taxation. Many of the drawbacks of S Corporations are that there are many restrictions on ownership.

Structure Differences
An S Corporation is a standard corporate structure. Being so, there are a few requirements such as a board of directors, minutes, and stock records that need to be kept in order to maintain your corporate status. The operational control of a corporation lies in the board of directors, which is elected by the stockholders.

The LLC structure is much more flexible than the S Corporation's structure. It allows a member of the LLC to manage operations. The LLC can either be managed by the owners, or designated managers. There are no restrictions on the ownership of an LLC, where in an S Corporation, there are several restrictions.

The LLC provides several benefits over the S Corporation in its flexibility of ownership. For example if you contribute $50,000 of capital, and your partner contributes $10,000 of the capital. In an S Corporation you would have to divide the company with an 83%/16% split. However, if you decided that your partner brings significantly more to the table than just capital such as business contacts. You could divide the company 50/50, or any other split you decide on in an LLC.

Taxation Differences
One way you can use an S Corporation to benefit tax wise over an LLC or being self-employed is the options of income. With an S Corporation, you will be able to choose between using dividends paid to shareholders or a salary to pay individuals. This can be useful for you tax wise to make your income become passive income or earned income.

An illustration of this difference can be seen in this example: Lets suppose you started up an online business and made $100,000 in a year. If you were an LLC you would pay self-employment tax on all of that $100,000. However if you were an S Corporation, you would set a salary based on the industry standard. Say $40,000, then you could pay the rest to yourself in dividends. Thus you would only pay employment tax on $40,000.

Why Not Elect S Corporation Status?
If you plan on re-investing a large percent of your profit into the business, S Corporation Status may not make sense. For instance if you plan on making $100,000 in a year, but only draw $10,000 and re-invest the other $90,000, you would be personally liable for those $90,000 gains even though you only paid yourself $10,000.

Electing S Corporation Status
If you decide that S Corporation Status is right for you, there are a few steps you have to take before you can Elect S Status. First you need an existing C Corporation. Once you have that set up, you can file an IRS form 2553. If you have a new corporation, you have 75 days to file the document with the Internal Revenue Service. However if you are an existing C corporation, you may Elect S Corporation Status by filling out the IRS form 2553 before March 15th.