Seeing your small business start to succeed and grow into a well-established company is a dream come true. But as your company grows, your tax rate tends to grow too. Growing companies face a variety of complexities during tax season, and that’s why when your company starts growing, you may want to consider forming an S Corporation, otherwise known an S Corp. The S Corp is a business entity that offers significant tax advantages while still preserving your ownership flexibility.
What is an S Corp?
An S Corp, small business corporation, is a tax code that was enacted into law by Congress in 1958. The S Corp was created to encourage and support the creation of small and family businesses, while eliminating the double taxation that conventional corporations were subjected to.
There are several advantages to forming a business entity. It protects your personal assets, gives you more financial visibility, and can make it easier to manage your taxes. If you choose the right type of corporate structure, you can significantly lower your yearly tax bill.
The easiest way for most business owners to reduce tax bills is to be taxed as an S Corporation. You can do this either by:
- Forming an S Corporation.
- Forming a Limited Liability Company (LLC) but electing to be taxed as an S Corporation.
- To understand why getting taxed as an S Corporation is more tax effective, it’s useful to understand the types of taxes you will need to pay.
The S Corp Tax Calculator
The S Corporation tax calculator below lets you choose how much to withdraw from your business each year, and how much of it you will take as salary (with the rest being taken as a distribution.) It will then show you how much money you can save in taxes.
An S Corporation must adhere to the following limitations:
- It may not have more than 100 shareholders.
- It is required to be a domestic business entity.
- The shareholders of the S Corporation must be US Citizens or legal residents of the United States.
- The S Corporation is restricted to only one class of stock.
Depending on your long-term business goals – for example, if you want your company to be publicly traded, or if you want to have international shareholders, a C Corporation might be a better choice of business entity, because C Corporations have no limitations on ownership and can offer multiple classes of stock.
The Benefits of S Corporations For Small Businesses
October 3, 2018byLisa Crocco
For entrepreneurs ready to start a corporation, navigating the benefits of different business entity types can be tricky. Between a Limited Liability Company (LLC), C Corporation (C Corp), S Corporation (S Corp), and Nonprofit, it may be confusing to decide what is the best route for your company.
Although forming an LLC has become one of the most familiar options for entrepreneurs when first starting out, an S Corp is also a popular choice among small business owners — and here’s why.
For small businesses, an S Corp offers tax advantages and liability protection while preserving ownership flexibility. This allows business profits to pass through to the shareholders’ personal tax returns — meaning that entrepreneurs are protected from the double taxation C Corp owners incur. In fact, the S Corp was specifically enacted into law in 1958 to help foster and encourage the creation of small businesses.
C Corps vs. S Corps for Small Business Taxes
As mentioned, C Corp owners incur double taxation, since they are subject to corporate as well as personal income taxes. But an S Corp receives different tax treatment that is generally more favorable to the business owner. Similar to an LLC, the S Corp is considered a pass-through entity for tax purposes.
Unlike an LLC, an S Corp also offers this wonderful benefit: the ability to pay yourself a salary! To make the most out of S Corps, business owners should pay themselves a reasonable salary, which will be subject to affiliated to payroll taxes. But that means any owners’ withdrawals or dividends you take out of the company are free of employment taxes and not subject to a corporate tax rate.
Other Benefits of an S Corp
There are other benefits of choosing an S Corp for your small business entity type, including flexibility for managing the ownership of the business. This means an owner can sell their ownership interest without receiving approval from the shareholders.
Asset protection for an S Corp works similar to an LLC — you have certain legal protection for your personal assets, since they are legally separate from your business assets.
Though an S Corp does have many benefits, that doesn’t mean it’s the right choice for every small business. Make sure to do additional research to see if another entity type would be a better fit for your business needs and growth plan.
Services we offer :
- Name Availability Check
- Help form your S Corp quickly and efficiently
- Notices of Various Corporate Meetings
- Articles of Incorporation
- Sample Bylaws
- Minutes to Document Meeting