What is a S-Corporation designation?
While many people believe that an “s-corp” is a type of business structure, like an LLC or C-corporation, that is not true. An S-Corporation, or “S corp,” is a tax designation granted to corporations and LLCs that allows the company to be taxed like a partnership while having the legal protection of a corporation or LLC.
Do I qualify for S-Corporation designation?
In order to be granted S-Corp status, your business must:
- Be a domestic corporation or LLC,
- Have only allowable shareholders (individuals, certain trusts, and estates),
- Have no more than 100 shareholders,
- Have only one class of stock,
- Not be an ineligible corporation
What are the benefits of S-Corp designation?
1. Tax Savings - One of the biggest advantages of s-corp designation is the potential tax savings. S-corporations do not pay federal taxes but are instead taxed as a pass-through entities. This means that the business is not taxed on its income, losses, deductions, or credits. Instead, the shareholders or owners report their income, losses, deductions, and credits on their personal tax returns and are taxed at their individual rates.
2. Liability Protection - As we’ve stated, because your business is filed as a corporation, you continue to have the legal protection offered by your incorporated entity. This means that your personal assets are protected from lawsuits against the business and corporate creditors.
3. Salary Options - Owners of an s-corporation have three ways to pay themselves: distributions, salary, or a combination of both. It’s important to understand that as a company shareholder and employee, you must pay yourself a “reasonable salary.” The IRS defines “reasonable salary” as an amount that would ordinarily be paid for like services by a like organization in like circumstances.”(1) After you have paid yourself a reasonable salary on which you will pay personal income taxes, you can be paid the remainder as a distribution which is not subject to employment taxes.
How do I file for s-corp designation?
If you meet the S-corporation qualifications above, you may file for s-corp designation by filling out Form 2553 on the IRS website (IRS.gov).
In order to claim S-corp designation for the current tax year, you must file and complete the process within two months and 15 days of a new year. If you do not file within that timeframe, you will not obtain s-corp designation until the next year.
After you have received s-corp designation you do not need to renew your status, but you do need to ensure that your business continues to meet the requirements outlined above. If your business does not continue to meet the necessary requirements, you will need to return to traditional LLC or C-corporation taxation.
If you have questions about the best business structure or taxation designation for your business, we are here to help. Contact Raiff Representation today to set up a one-on-one consultation.