What is an S-Corp?We’re Just Not Annoying®
S-Corp election for LLCs & Corporations
To become an S-corp, you must apply with the IRS. Any business that meets the IRS qualifications can become an S-corp. An S-corp is not actually a different entity, like a C corp or an LLC. It is a tax designation granted by the IRS. If you apply to be an S-corp, your company will be taxed differently and will be required to meet and maintain certain requirements.
To apply for S-corp election, you must meet all the eligibility requirements and submit the Form 2553 to the IRS.
Or if you’re a C corporation:
The corporate income tax rate is usually higher than the personal tax rate. If you have a regular C corporation, you’ll keep the profits of the company at the corporate level. You don’t have to pull it down to you personally. If you ever decide to take a dividend, you’ll be paying tax twice though.
If you declare your C Corporation an S corp., you’ll have to pull the net taxable income down to the shareholder’s personal tax returns, and pay the profits at whatever taxable income bracket you’re in. This usually will save you a lot of taxes unless you plan on keeping a lot of cash in the company, and ultimately re-investing it back in the company.
If you would like to make the S corp. election with the IRS, we would be glad to help you make this step.
What Exactly is an S-Corporation?
“S-corporation” is a tax status given by the IRS. A business that wishes to be taxed as an S-corp must apply to change their status with the IRS. First, your business must qualify. The IRS has specific qualifications, and if you do not meet them you cannot be granted an S-corp election.
Is an S-Corp a Different Entity Type?
No. It is a common mistake, but an S-corp is not an actual entity type. It is simply a tax status granted by the IRS. If you are an LLC, you can apply to be taxed as an S-corp. Your business will still be an LLC, but you will be taxed differently by the IRS.
Who Can Be an S-Corporation Shareholder?
The IRS has specific qualifications for who can be a shareholder/member of an S-corp. Only the following are allowed to be shareholders/members of an S-corp:
- US Citizens
- Permanent Residents
- Single Member LLCs Owned by a US Citizen or Permanent Resident
- Qualified Subchapter S Trusts
- Certain Voting Trusts
- Grantor Trusts
- Bankruptcy Estates
- Revocable Trusts Created as Part of an Estate
- Certain Exempt Organizations
C-corporations, nonresident aliens, partnerships, multi-member LLCs, LLPs, and foreign trusts cannot be shareholders/members of an S-corp.
What Are the IRS Restrictions for S-Corps?
The IRS has specific requirements for S-corp election. To apply for S-corp status, your company must meet all of the following:
- Be a Domestic Entity
- Have Allowable Shareholders/Members
- Have No More Than 100 Shareholders/Members
- Have Only One Class of Stock
- Not Be an Ineligible Entity
What Are the Advantages of an S-Corp?
- No Double Taxation
- Taxed on Wages of Shareholder Employees, Not on Net Income
- Distributions Taxed Lower Than Employment Taxes
What Are the Disadvantages of an S-Corp?
- Corporate Formalities Required by Law
- Shareholder Employee Salary Must Be Competitive
- Audits Can “Re-Distribute” Salary and Distributions