How Do S Corporations Work?
S corporations are entities that can pass corporate income, losses, deductions and credits through to shareholders for federal tax purposes. Shareholders report the flow-through of income and losses on their personal tax returns and are assessed a tax at their individual income tax rates. The TCJA also gives S corporation owners a 20% deduction on income.
An S corporation offers investment opportunities from the sale of stock and the coveted protection of limited liability. This means that company directors, officers, shareholders and employees enjoy limited liability protection. Your business can continue to exist even if the owner leaves or dies. The good news, too, is that in general S corporations have to file taxes only yearly and not quarterly like C corporations.
It sounds like a good deal, but not every company can be an S corporation. You have to meet the following requirements:
If you meet these qualifications, you have to take a number of formal steps to become an S corporation. You have to choose a legal name and reserve it, apply for a business license and other certificates specific to your industry, and obtain an Employer Identification Number. Rules may vary depending on the jurisdiction.
Also, despite the pass-through advantages, S corporations still have to meet certain responsibilities. They must prepare and file income tax and estimate tax forms. (Some of these are especially complicated.) They also are responsible for Social Security and Medicare taxes, federal unemployment taxes, and relevant excise taxes.
The individual S corporation shareholders are responsible for income and estimated taxes.
But while there's a lot to love, there are a few things to consider:
The S corporation is just one of a number of ways to organize your business. Is it right for you, or is there another way that would be more appropriate? We can help walk you through the financial and practical details.
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