S Corp is short for S- corporation. S-corporations are pass-through entities, meaning that they are not subjected to federal taxable income. Instead, the owners (known as shareholders) are taxed according to their personal income tax bracket. S-Corps offer investment opportunities, as well as unlimited lifetimes, and limited liability.
There are many differences between S-corporations and, the more common, C-corporations. The first is that S-Corps receive more tax benefits due to being considered a flow-through tax entity. Similar to a sole proprietorship, partnership, or LLC, the profits and losses of an S-corporation will go through the owner’s personal tax returns.
It is good to note that in order to become an S corp, you must first become a C corp. Once this is complete, you may then file subchapter s corp status as long as you meet all of the requirements. These requirements include:
S-Corps are not subject to double taxation, while C-Corps are. This means that an S-Corp is considered a pass-through entity. Pass-through entities are only taxed after they are paid out as salaries or dividends to their shareholders.
This saves S-Corps a lot of money and also means that filing as a C-Corp does not make any sense for a small business. It is important that S-Corps have a good accountant because one mistake in filing can require your company to go back to C-Corp status and suffer dual taxation.
There are a few ways that S-Corps are taxed:
Corporations offer many advantages. This includes avoiding double taxation while avoiding liability. S-Corporations are best for businesses that have owners who want to protect their personal assets from the claims of business creditors.
If you are a sole proprietor, then forming as an S-Corporation may not be worth it for you. This is because there are various requirements of an S-Corp, such as having a board of directors, filing annual reports, holding shareholder’s meetings, and operating at a higher level of regulatory compliance. You will also need to file payroll taxes even though you are the only employee. This might simply be a hassle and cost you more than it is worth.
There are several forms of taxation, and a limited liability company (LLC) is one of them. LLCs are the most flexible when it comes to taxation, as they can elect to be taxed as any form of corporation. Choosing to be taxed as an S-Corp oftentimes provides the best tax savings.
If you are looking to avoid liability as well as double taxation, then an S-Corp is a great option. Not only will the owners of the company avoid personal liability, but more profits of the company will be kept within the corporation, instead of paid out to the IRS.