Incorporating your business adds legitimacy to it while also formally spreading out the responsibilities associated with it to your corporate partners. Yet with it also comes added liabilities, among which are new tax regulations. Many business owners and executives who (like you) have considered incorporating have come to us here at Palmer & Manuel PLLC questioning how they might enjoy the benefits of being a corporation yet still enjoy some of the special treatment afforded to small businesses. One way to accomplish this can be incorporating as an S corporation.
An S corporation (also referred to as a subchapter S) is a type of corporation that allows your business to avoid the issue of double taxation (having income taxed at both the corporate and personal levels). If you file as a standard corporation (a “C corporation”), your business is considered to be a separate entity from your shareholders. Thus, you pay taxes on your annual earnings and your shareholders pay income tax on their dividend payments. With an S corporation, you are allowed to pass corporate income, losses, deductions, and credits directly through to your shareholders. This allows them to pay taxes on such income at ordinary tax rates and reduces your corporation’s tax liability to built-in gains and passive income.
According to the Internal Revenue Service, your business must meet the following requirements to qualify for S corporation status:
- It must be a domestic corporation
- Its shareholders are limited to individuals, estates and certain trusts
- It has less than 100 shareholders
- It offers only one class of stock
- It must not be a financial institution, an insurance company, domestic international sales corporation, or certain other types of ineligible corporations
Certain tax benefits may be available for a business operating as a subchapter S.
You can learn more about incorporating your business by continuing to explore our site.