There are several benefits of S Corp election for corporations. From saving thousands of dollars in taxes, to protecting your personal assets, filing for S Corp status has several advantages. Read on to learn more about the benefits of S Corp election for corporations. Contact A People’s Choice for more information about how to form an S Corp in California.
What is an S Corporation?
An S corporation, sometimes referred to as an S Corp, is a special corporation created through an IRS election. A domestic corporation can avoid double taxation by electing to be treated as a S Corp. A business seeking S Corp status must first register its corporate status with California’s Secretary of State. Once a business is considered a corporation, all shareholders must sign and file Form 2553 to elect S corp status.
Advantages and Benefits of S Corp Election
Below is an overview of the benefits of S Corp election for corporations:
Tax Savings of an S Corporation
A business can save thousands of dollars by obtaining S Corp status. Wages of the S Corp shareholders who are employees will be subject to employment tax. Any remaining income will be paid to the employee as a “distribution” which is taxed at a lower rate. This means income is not taxed twice as corporate income and again as dividend income. In addition, certain expenses the business or employees incur can be written off as a business expense.
Asset Protection with an S Corporation
By operating as an S Corp, your personal assets will be shielded from the claims of business creditors arising from contracts or litigation. All owners will have limited liability protection.
Pass-through Taxation of S Corporation
An S Corp allows pass-through taxation for income tax purposes. Business income, in addition to tax deductions, credits, and losses are passed through to owners. Such income is not taxed at the corporate level. This helps business owners avoid “double taxation.”
An S Corp can continue to exist even if the owner dies or leaves. Taxes must be filed once yearly and a business can attract investors through the sale of shares or stocks.
Disadvantages of an S Corporation
Though there are several advantages of S Corp election for corporations, there are also some disadvantages in doing so such as the following:
S Corp Regulatory Requirements
A disadvantage of an S Corp is the strict regulatory requirements. For example, S Corps require the scheduling of director and shareholder meetings. Minutes from the meetings must be kept in addition to the adoption and updates to by-laws, stock transfers, and record maintenance. An S Corp must observe all corporate formalities imposed by California laws
Eligibility Requirements of S Corp
There are strict requirements for a business to obtain S Corp status. Only individuals, estates, and tax-exempt organizations can be shareholders. An S Corp cannot have more than 100 shareholders and there can only be one class of stock.
A business owned by a U.S. citizen and permanent resident is eligible for S Corp status. An S Corp cannot hold more than 100 shares and will likely undergo IRS scrutiny. Contact A People’s Choice for more information about the benefits of S Corp election for corporations.