Of all the business entities someone could form, the S corporation is by far the most misunderstood. This is because the S-Corp is a tax designation rather than an actual business entity. Both limited liability companies (LLCs) and corporations can file to be taxed as an S corp. However, no state offers entrepreneurs the option to incorporate their business as an S-Corp; instead, those who want an S-Corp must file a form with the Internal Revenue Service.

The S-Corp’s process to get started is confusing. But that the formation process is not the only thing that creates confusion. It is a common misconception that S corps will automatically save owners 15% on their taxes. To avoid and explain more about S corporations, below you’ll find a complete breakdown of what the S-Corp actually is, how to form one, and what you should know before you do.

The S election gives a corporation the tax advantages of a pass-through entity. The S election can also give an LLC the tax advantage of corporate distributions, which aren’t subject to self-employment taxes. Check out some of the Requirements of the S Corp Election below.

 

S Corporation Requirements

Although the S-Corp can present entrepreneurs with a wide range of advantages, it is not without its restrictions. Below are requirements for LLCs and corporations seeking S corporation tax status:

• LLCs and corporations that file to be taxed as an S-Corp must be domestic companies
• Shareholders or members of S corps must be individuals, estates, or certain types of trusts; S-Corp shareholders cannot be partnerships, other corporations, or non-U.S. residents
• S corps may only have one class of stock
• An S-Corp may have no more than 100 shareholders (or members if an LLC)
• Certain types of corporations do not qualify: some financial institutions, insurance companies and domestic international sales corporations
• All shareholders or members must pay themselves a reasonable salary
• Shareholders or members are directly responsible for the profits and losses according to their share of ownership

In closing, it has been known that the S Corp Election has been a known as an optimal tax designation, there are always many pieces to the puzzle. It is best to consult with your trusted accountant or tax planner before making any final decision. Reach out to us at BASC Expertise today to schedule a consult on whether this would be right for you! You can reach us at 480-355-1398 or deirdre@bascexpertise.com.