Before you can get your small company rolling, you need to decide on a business structure. Your business entity impacts everything from taxes to profits and losses, so it’s essential that you choose a structure that works for your company. One popular small business structure is an S corporation.
According to the SBA, 47.3% of small employer firms structure as S corporations. So, what is an S corporation? Learn the ins and outs of S corporations, what makes them attractive business structures for small businesses, and how to form one.
What is an S corporation?
An S corporation, or S Corp, is a type of corporation that is a separate legal entity from its owners. S Corp owners, called shareholders, enjoy pass-through taxation and limited liability protection.
Unlike C corporations, S corporations are not taxed twice. An S Corp is only taxed at the personal level, similarly to sole proprietorships and partnerships. But unlike sole proprietorships and partnerships, shareholders are not personally liable for the S Corp’s losses.
Because of the benefits of S Corp taxes and limited liability, choosing this business structure is an attractive option for many business owners.
If you own an S Corp, you can receive both wages and distributions. A salary is subject to payroll taxes, while distributions are not. However, you must pay yourself a reasonable salary—that way, the IRS will not think you are paying yourself high distributions and low wages to avoid employment taxes.
You can only structure your business as an S Corp if you meet the following IRS requirements:
- Your business is in the United States
- There are 100 or fewer owners
- All owners are U.S. citizens or permanent U.S. residents
- You have one class of stock
- All shareholders meet eligibility requirements (e.g., individuals)
In most states, S Corp owners are required to pay annual fees, such as franchise taxes. However, S Corp fees are generally minimal.
If you decide to pursue an S corporation business structure, you need to register.
S Corp registration
To form an S Corp, you first need to structure your business as a corporation.
To structure your business as a corporation, file articles of incorporation with your state. You will also need to obtain a Federal Employer Identification Number (FEIN). And, make sure you obtain the appropriate business permits, issue stock certificates, and appoint directors and officers.
Once you have formed a C Corp, you can file Form 2553, Election by a Small Business Corporation, to elect S Corp status. You must file this S corporation form within two months and 15 days within starting your business or starting a new tax year. And, all shareholders need to sign Form 2553.
If the IRS accepts your S Corp application, they will notify you in writing.
Check with your state for additional S Corp registration requirements.
S Corp filing
To report your S Corp’s profits and losses, you must file Form 1120S, U.S. Income Tax Return for an S Corporation. And, owners need to file Schedule K-1 to report profits and losses on their personal tax returns.
The S Corp filing deadline for tax reporting is March 15 of each year.
What are the other business structures?
Despite its benefits, an S Corp might not be the best business structure for you. Only 4.7% of businesses without employees structure as S corporations.
If you decide you don’t want to form an S Corp, you have options. Other business structures include:
- Sole proprietorships
- Partnerships
- Corporations
- Limited liability companies (LLCs)
Research business entities before structuring your business. And, meet with a small business lawyer for guidance.
No matter how your business is structured, you need to maintain accurate accounting books. With Patriot’s online accounting software, you can easily record income and expenses. Plus, we offer free, U.S.-based support. Get your free trial today!
This is not intended as legal advice; for more information, please click here.