One of the first things you do when starting a new business is choosing a business structure. Each entity type has different methods of taxation. When choosing, you should take into account how many employees you have, how much growth you expect in the first few years of business, and whether you need corporate protection. If your business does not require a lot of corporate protection, you might choose something other than a corporation. Maybe you need some protection, but not a lot, so you can choose another type of entity that has better tax benefits. Business attorneys at France Law can help you determine which business entity is best for your business, including looking at the benefits of setting up as an S corporation. Learn about some advantages and aspects of S Corporation Taxes.
Setting Up an S Corporation
Some people prefer to choose another entity type because of the extra work needed to set up an S Corporation. However, the benefits you get by incorporating as an S corporation outweigh the minor hassle of setting this business structure up. You do not pay corporate taxes since the taxes pass through to the company’s owners. You have to set your company up as a limited liability company or a C corporation, then file IRS Form 2553 to elect S corporation taxation. However, not all LLCs and C corporations are eligible for the S corporation status. A business tax attorney at France Law can help you determine if your company is eligible.
Tax Benefits of Electing S Corporation Status
You can take advantage of three benefits of setting up as an S corporation, including:
No Double Taxation
If you incorporate as a C corporation, you pay taxes twice: Once as your business and then again as a shareholder. When you incorporate as an S corporation, you do not pay taxes as a business. Instead, the tax burden passes through to the shareholders so that you do not pay taxes twice on the same income.
You pay income on the profits your company makes. Once you deduct the taxes, the rest of the profit is distributed to your shareholders. The shareholders then pay taxes on that income – the very same income you just paid taxes on.
Shareholder / Employee Status
Limited liability company members are not classified as employees. However, if they choose to elect the S corporation status, they are then employees and have to collect a salary. However, the members must actively participate in the business.
Since they collect a salary, the employer pays half of the FICA, and the member pays the other half. However, if the salary is reasonable, S corporation holders can elect to pay part of the salary as a regular paycheck and distribute dividends as part of the salary. You do not pay FICA on dividends.
However, the Internal Revenue Service watches to ensure that shareholders / employees do not take advantage of this. You could pay a $60,000 salary plus $15,000 in dividends to make up a $75,000 yearly salary but would run into trouble with the IRS if those numbers were reversed.
Limited Liability Protection
An S corporation takes on the protections of the original entity. The S corporation starts as a C corporation or a limited liability corporation; thus, it has the protections that those two entities provide. You can allow creditors and others to pierce the corporate veil if you personally guarantee a debt – but only for that particular debt.
Contact Business Law Attorneys at France Law
Setting up a new company is often complicated, especially if you have several members or shareholders and employees. Business law attorneys at France Law can help you set up your company in the manner which is best for your situation.
Our tax attorneys can also help you prepare your financial statements, issue W-2 forms and file your taxes, including the 1120-S form required for S corporations. Contact France Law today for a consultation to learn more about setting up a business as an S corporation to take advantage of the available benefits.