Keys For Using An S Corporation
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Keys For Using An S Corporation
If you have been considering forming a corporation or other business entity to provide yourself with limited liability and financing options in your business venture you have made an important first step. You may have compared the tax benefits of corporations and limited liability companies or limited partnerships. If you have done so you likely realized that corporations are taxed twice while limited liability companies and limited partnerships are taxed once. While a corporation’s profits are taxed once as the corporation’s income and again when the profits are distributed as dividends a limited liability company or limited partnership’s profits flow through the entity and are only taxed once as personal income to the individual member of the limited liability company or partner in the limited partnership. This is referred to as flowthrough taxation. Based solely on the tax treatment of corporations you may be prepared to use a limited liability company or limited partnership for your business.
While limited liability companies and limited partnerships feature outstanding charging order protection Nevada has recently extended such protection to corporations with between two and seventyfive shareholders.
Before you decide which business entity to use there is one more option for you to consider. If you choose to use a limited liability company or a limited partnership your business may limit its financing options. Financing for a limited liability company or a limited partnership may not be as readily available as financing for a corporation because interests in such entities are not as transferable as interests or shares of stock in a corporation. An Scorporation is the alternative that provides both financing options and flowthrough taxation; however to be treated as an Scorporation your business must do the following:
Incorporate the Business As with a regular corporation referred to as a Ccorporation an Scorporation must prepare and file Articles of Incorporation with the state prepare and operate under Bylaws operate under a Board of Directors and corporate officers and engage in corporate formalities.
File an SCorporation Election Form To be eligible for Scorporation tax treatment the corporation must 1 be a corporation organized in any U.S. state 2 not be an ineligible corporation certain types of businesses are not eligible and 3 have only one class of stock. If eligible the corporation may file an Scorporation election form Form 2553 with the Internal Revenue Service within fortyfive days after incorporating. While this will allow flowthrough federal taxation it is important to note that five states do not recognize Scorporations and may tax the corporation as a Ccorporation. It is also important to note that Scorporations are not eligible for certain tax deductions that Ccorporations may enjoy.
Notice and Obey SCorporation Limitations Once the corporation has made its Scorporation election it must notice and obey the limitations on Scorporations to maintain its flowthrough tax status. If the corporation violates any of the following limitations it will lose Scorporation status and will not be eligible for flowthrough taxation for five years: 1 it must have one hundred or fewer shareholders; 2 all of its shareholders must be individuals descendants’ estates estates of individuals in bankruptcy or certain trusts because business entities may not be shareholders; and 3 all of its shareholders must either be United States citizens or resident aliens in the United States nonresident aliens may not be shareholders. If the corporation loses its flowthrough tax status the Internal Revenue Service will treat it as a Ccorporation.
Every business is unique. Your business’s form should be based on your specific circumstances. While the limitation on the number and types of shareholders allowed in Scorporations may affect financing options such limitations may have less practical importance than the limitations on financing options created by using a limited liability company or a limited partnership. Accordingly Scorporations’ tax benefits management structure and transferability of shares may provide the benefits that your business needs in an entity that also provides you with limited liability. By considering your business’s options and choosing the best available business form you will ensure that you take advantage of available opportunities.
About the writer:nbsp;nbsp;Garrett Sutton Esq. is a corporate attorney and is the author of Own Your Own Corporation and other titles in the Rich Dad Advisor series. His firm forms and maintains corporations LLCs and other entities and may be reached at http://www.corporatedirect.com.To get a FREE copy of Garrett’s book “What to Know Before you Incorporate” log onto http://www.corporatedirect.com
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