Schedule S

An S corporation (or S Corp) is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S Corp.

• A corporation with the Subchapter S designation from the IRS is be considered an S Corp,

  you must first charter a business as a corporation in the state where it is headquartered. According to the IRS, S Corps are "considered by law to be a unique entity, separate, and apart from those who own it." This limits the financial liability and responsibility for owners or shareholders. S Corps do not shield you from all litigation such as an employee’s tort actions as a result of a workplace incident.

  • Different from a traditional corporation in that profits and losses can pass through to your personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed. There is an important caveat, however; any shareholder who works for the company must pay him or herself "reasonable compensation." Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as "wages."

• How to form an S Corporation?

  • Before you form an S Corporation, determine if your business will qualify under the IRS stipulations.

  • To file as an S Corporation, you must first file as a corporation. After you are considered a corporation, all shareholders must sign and file Form 2553 to elect your corporation to become an S Corporation.

  • Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state, and locality.

• S Corp taxes:

  • Most businesses need to register with the IRS register with state, and local revenue agencies, and obtain a tax ID number or permit.

  • All states do not tax S Corps equally. Most recognize them similarly to the federal government and tax the shareholders accordingly. However, some states (like Massachusetts) tax S corps on profits above a specified limit. Other states don't recognize the S Corp election and treat the business as a general corporation with all of the tax ramifications. Some states (like New York and New Jersey) tax both the S Corps’ profits and the shareholder's proportional share of the profits.

  • Your corporation must file Form 2553 to elect "S Corp" status within two months and 15 days after the beginning of the tax year or any time before the tax year for the status to be in effect.

• Positive attributes:

  • Tax Savings: One of the best features of the S Corp is the tax savings. While members of an LLC are subject to employment tax on the entire net income of the business, S Corp shareholders/employees are subject to employment tax only on their wages. The remaining income is paid to the owner as a "distribution," which is taxed at a lower rate, if at all.

  • Business Expense Tax Credits: Some expenses that shareholder/employees incur can be written off as business expenses. – Independent Life. If a shareholder leaves the company or sells his or her shares, the S Corp can continue doing business relatively undisturbed.

• Negative attributes:

  • Strict Operational Processes: As a separate structure, S Corps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers, and records maintenance.

  • Shareholder Compensation Requirements: A shareholder must receive reasonable compensation. The IRS takes notice of low salary/high distribution combinations, and may reclassify your distributions as wages.