An S-Corporation isn’t necessarily a business entity in itself. Instead, an S-Corporation is a business that is already formed (C-Corporation or LLC) and elects to be taxed differently. This election has strict requirements that must be followed in accordance with IRS Codes.

 

The company must be a domestic corporation, can have no more than 100 shareholders, and can only have one class of stock. When choosing the S-Corporation election, owner-employees are required to pay themselves a “reasonable salary” in order to perform their daily duties in the business. The IRS, however, has not provided clear guidelines on what constitutes a “reasonable salary.”

 

The most common reason for a company to elect S-Corp status is the advantage to its taxation. Income from the business is passed through to the shareholders/members, who report the income on their personal tax records. With the S-Corp election, the owner-employee pays themselves a “reasonable salary” on which the business will pay payroll tax. At the end of the year, the owner can take the profits as a distribution, which is not subject to self-employment taxes.

 

Benefits of Choosing S-Corporation Status

• Pass-through taxation

• Limited liability protection

• Ability to raise capital through the sale of stock

• Potential tax savings through deductions on business expenses

 

Drawbacks of S-Corporation Status

• Stricter operational guidelines

• Limited number of shareholders

• Restrictions on ownership by non-U.S. citizens

 

An S-Corporation is a type of business entity that elects to be taxed differently under IRS regulations. By meeting the requirements and following the guidelines for S-Corporation status, businesses can take advantage of pass-through taxation and potential tax savings. However, it is important to carefully consider the restrictions and operational requirements that come with choosing S-Corporation status. If you're interested in learning more about an S-Corporation and whether you could benefit from this tax election, contact Howard Law for more guidance.