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If you qualify, you can make an S Corp election with the IRS to be treated for tax purposes as a partnership rather than a corporation or LLC. This avoids the double-taxation of having your income as a business holder taxed at your personal level and the corporate profits being taxed at the corporate level. With the S Corp election, everything is taxed at your personal level and all of the profits are merely considered pass through income to the owners. We can take care of this administrative step to save you thousands.
S Corporation Election
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S Corporation Election
What Is An S Corporation Election?
S Corporation is formed by filing an IRS tax election; it is widely known as S Corp Election. S Corp protects the owner from liability and helps those that can sidestep dual taxation. S Corporation is the most common type of corporation, and about 70 percent of business entities are an S Corp.
S Corporation Requirements
There are a handful of requirements that business entities need to meet to file for an S Corporation.
- No more than 75 shareholders to file for an S Corp.
- Husband and wife will be counted as one shareholder in total of 75 shareholders’ limit.
- Only tax-exempt charity groups, certain partnerships, individuals, certain trusts, estates, and other S Corporations count as shareholders.
- The corporation cannot have investors from other countries; it must be U.S. based.
- You are not eligible for S Corporation elections if you have published both common and preferred stock. You must have only one class of stock issued.
- Your year-end must be December 31st.
- S Corporation can only be made within two months and 15 days after the first day of your taxable year.
- All shareholders must agree on the S Corp election.
Advantages of S Corporation Election
More than half of the businesses have become S Corp, and there is a reason behind it.
There are several advantages of becoming an S Corporation:
- You don’t need a partner to become an S Corporation; you can become an S Corporation alone. However, some states require at least two people to form an LLC.
- LLCs usually have a limited lifespan; while an S Corporation doesn’t have the limited life expectancy, it always exists.
- S Corporation allows you to snip your stock in S Corporation. It means a shareholder does not need any approval of the other shareholders; he can sell his interest whenever he wants.
- S Corporation is helpful in terms of self-employment taxes to LLCs.
- S Corporation protects owners from any corporation’s debt, liability, or lawsuits.
CPA CLINICS’ team of professionals can help with your incorporation and S Corp election. We can also assist with your Payroll needs and properly manage your finances, so that you may truly reap all of the benefits that come along with being an S Corp.
Advantages of S Corporation Election
- While owners of single proprietorships and partnerships need to pay self-employment tax, S Corporations have their profits reduced by the amount paid to owners as employees. In S Corporation, the gains are reduced by the amount paid to the owner as an employee.
- The total self-employment tax is much lower.
- S Corporations do not pay double tax. Systematic corporations pay income tax on their profits while the partners or owners’ tax the dividends they receive.
- The S Corporation-enabled firm doesn’t pay income tax. It works as a “pass-through” tax, which means the owner pays income tax based on their profit shares.
- Each owner shares the equal loss “pass-through” to their income tax return if an S Corporation makes a loss. The owners pay less tax overall if they have any other income, and the loss reduces that part of their income.
S corp election FAQ's
The S Corp Election can be filed after the 75 days of beginning of tax year.
S Corp election alters your LLC’s or partnership federal tax status. Normally, the S-Corp election is filed with the IRS; it changes how your business pays tax. Saving money is a positive step for certain businesses.
With the S Corp Election status, all the profit or losses “pass-through” the business to the owner. Once the LLC get the S-Crop Election status, it no longer pays any tax. Instead, all the profits and losses are reported in your tax return.
If you are a small business owner, it is often a good idea to change your business entity status. This change of status can provide you with tax savings. The payroll taxes on the owners are high if the business operates as LLC and does an active trade or business.
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