When you start a new business you need to decide on the business structure you would like to use, which can be a long and arduous process. S Corporation is one of the forms that you can pick from, but you must be aware of the structure and its advantages for your business.
Also called S subchapters. S Corps are businesses who are selected for S Corps via the IRS in accordance with certain Internal Revenue Code requirements, for example:
- Being incorporated domestically inside the US.
- With less than 100 shareholders that meet the eligibility criteria.
- The stock must be in one class.
S Corps status grants business incorporation benefits while also receiving tax-exempt benefits of partnerships and sole-proprietorships. The benefits of operating the S Corps include:
If you are running in an S Corps, your personal assets are not a part of the assets of your business. This gives you protection from the company’s liability since lenders and suppliers cannot take your personal assets to repay loans or other debts.
It also shields you from any loss that your business could be liable for as they are locked in the business. However, liability protection isn’t a complete protection and you could still be subject to legal action if your actions harm another business or an individual.
Because S Corps are pass-through entities and don’t have to pay taxes at the same rate as other companies. Pass-through taxation permits the company to distribute the profits or revenue of the business to shareholders in dividends or as salary, provided they do not surpass the shareholder’s basis in stock.
If the dividends that are transferred to the shareholder are more than their stock’s basis The excess is typically assessed as capital gains. However taxes are lower than the tax imposed in normal income.
This allows you to reduce self-employment tax that sole proprietorships as well as partnerships are required to pay in large amounts saving you money in the long term. You may also deduct the salaried wages when you calculate the earnings you’ll transfer to shareholders.
Straightforward Ownership Transfer
In the case of a partnership or an LLC in a partnership, the transfer of more than 50% of the interest could cause the termination of the company. Even when the transfer is acceptable of shares, shareholders can be subject to negative tax implications.
It isn’t the case with S Corps, shareholders can change the basis of their properties or transfer interest without having to comply with the complicated accounting rules or having to face tax burdens of extreme magnitude.
If your company grows and is able to meet the requirements of a typical company it’s easy to convert. All you have to do is apply for the conversion vote through the IRS.
This is different from the process of converting into the LLC in to an S or C-corporation, which requires business owners to follow laws governing LLC and state laws regarding corporations. Also, you need to submit certain documents to the state in which you reside.
Most companies use the accrual accounting system in the event that they’re classified as smaller companies. Smaller companies usually have gross receipts that are less than $5,000,000. However, S Corps uses the cash-based method of accounting.
In the method of accrual accounting in the accrual accounting method, businesses are able to recognize revenue and expenses when they occur. However, in the accounting method based on cash the business recognizes both in the event of an exchange of money. Because the method of accrual does not monitor cash flow, you may not be aware of a cash shortage in the immediate time frame and this could result in losses later.
But, the cash base method allows S Corps to track real-time cash flow, and pinpoint any shortfalls as soon as they happen. This improves the chances of resolving the errors and ensuring that it is able to continue operating.
The application for S Corp status shows the public your commitment to the company due to an official commitment. This allows you to build the credibility of your employees and customers, partners and customers. This, in turn, increases sales and gives you an edge in the market.
A S Corp helps you save on self-employment taxes by permitting you to transfer the profits and revenues of your business in the form of dividends and salary for your investors. It also shields the personal belongings of your individuals from company’s liability and provides an easier way to own and convert your assets.
Although S Corps have many advantages, S Corp has many advantages over partnerships, corporations, and sole proprietorships, the process of applying could be just as lengthy like opening a business of any other type. So, it is important to study your state’s procedure as well as the requirements and requirements as they may be different from state-to-state.
The most important items you need to take care of include choosing a company name as well as naming members to your directors’ board, registering incorporation documents, and the writing and filing of corporate bylaws.