Why an S Corporation May Be the Right Fit for Your Business

Why an S Corporation May Be the Right Fit for Your Business

All businesses are interested in reducing their tax liability. In fact, this is the main reason business owners think long and hard about a company's structure before opening shop. The two most common ways of structuring a business include the corporation or the limited liability company, or LLC. However, there is one other important option on the table: the S Corporation. See how choosing an S Corporation can save you money when tax time comes.

Defining the S Corporation

In business law, an S Corporation has a very specific meaning. In reality, it is not an actual business structure. Instead, it is a special tax designation for qualifying corporations. Thus, in order to become an S Corporation, your business must be a corporation in the first place. Owners of an LLC may also elect to have their business treated as an S Corporation.

A Look at the Tax Considerations

There are some key differences between C Corporations and S Corporations. In a typical C Corporation, a company is taxed on its earnings. In addition, shareholders in a C Corporation are taxed a second time when they receive funds as dividends. This double-taxation is one of the drawbacks to creating a C Corporation. However, this type of corporate structure is necessary to create a publicly-traded company.

S Corporations differ in that they are "pass-through" entities when it comes to taxation. In other words, the company's profits are only taxed at the shareholder level. Therefore, it is said that the taxable income passes through the company to the shareholders. Considering this, the income of an S Corporation is taxed only once.

Some of the Other Benefits

There are a few more advantages to using an S Corporation. For one, a self-employed business owner can avoid the self-employment tax. This means he or she will not be required to pay things such as Medicare or Social Security taxes. Shareholders in an S Corporation also benefit when the business is sold. Again, the lack of double-taxation makes it possible to pay taxes only once the proceeds reach the shareholders. Finally, the shareholders in this corporate structure remain shielded from debt liability, just as with a C Corporation.

Getting Started on the Process

There are several steps to take if you are interested in starting an S Corporation. As mentioned, your business must already exist as an LLC or corporation. Once you elect to convert to S Corporation status, you must notify the IRS by submitting Form 2553. This form needs to be filed within two months and 15 days after the beginning of the applicable tax year. In Utah, you may also have to file a TC-20S form with the state. In any case, it is best to work with an experienced attorney who can assist with business law matters.

To get more information about business law issues or contract litigation, contact us at the law office of TR Spencer & Associates.

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