What’s an S-Corporation? (S Corp)

If you’re looking for a business structure that offers some unique benefits, an S-Corporation may be a great option for you. An S-Corp is a type of entity that can offer its owners significant tax advantages, as well as the ability to avoid the double taxation faced by C Corporations. However, there are some requirements that must be met in order to become an S-Corporation. Read on to learn more about this valuable business structure, and the steps you need to take in order to set up an LLC as an S-Corporation.

While S Corporations are legal entities that have been recognized by the federal government, they do not actually exist as separate companies from their owners. To qualify as an S-Corporation, a business must meet a number of requirements, including:
• Be a for-profit company;
• Not be a partnership or a trust;
• Have no more than 100 shareholders;
• Not issue preferred stock;
• Conduct all its business activities within the U.S. or Canada; and
• Earn less than $1 million per year in revenue (or less than $5 million annually for tax-exempt organizations).

If a business does not meet the requirements to be an S-Corporation, then it must become a C Corporation. There are several benefits to becoming an S-Corporation, including lower tax rates and fewer taxes in general. However, it’s important to note that there are some downsides to becoming an S Corporation as well. For example, owners of S-Corporations are considered “shareholders” for tax purposes, which means their earnings are subject to personal income taxes.

The major disadvantage is probably obvious – it’s complicated and time-consuming to form a corporation. This is a reason a lot of people choose to stay as sole proprietors. But if you’re serious about being a business owner for the long term and you want to do some good estate planning for your family, it’s a good move.
A corporation that elects to be taxed as an S Corporation is referred to as an S Corporation. These corporations are also known as Subchapter S corporations. One of the main advantages of this type of corporation is that profits are not subject to federal income tax at the corporate level. Instead, these profits are distributed to the shareholders in the form of dividends. Generally, shareholders pay taxes on any dividends they receive from the corporation. However, for shareholders who earn less than $157,500 of dividend income, they can deduct this dividend income from their taxable income.

The S Corporation does not pay corporate taxes, but shareholders are taxed on their share of the corporation’s profits (aka its “pass-through” income). Shareholders can elect to be treated as a sole proprietorship rather than a shareholder of an S Corporation and receive only one W-2 instead of two. This can result in a significantly lower tax bill. Further, shareholder distributions can be completely excluded from the individual taxpayer’s income.

Shareholders who actively participate in the business (i.e., perform services, earn wages, etc.) are subject to FICA taxes. With an S corporation, only the wages paid to its owner/employees are earned income subject to FICA tax. The income paid by an S corporation to its shareholders is not subject to FICA tax. The employer portion of the payroll taxes will not be paid by either the owner or the corporation and the employee share of the payroll taxes will be deducted directly from the employee paycheck.

The wages paid to an owner of an S corporation are not subject to FICA tax, as long as the wages qualify as reasonable compensation for services performed for the corporation. The compensation paid to the owner must be “reasonable” under the Internal Revenue Code. This means that the amount paid must reasonably compensate the individual for his or her services and/or abilities.