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S CORPORATION FILING
If you have been running a business corporation (C Corporation) or a limited liability company and are thinking of how best to enjoy tax benefits then the option is to change taxing of your company to that of an S Corporation. You can also elect to form
an S Corp if you are planning to set up a new business. So, what is an S Corp?
What is an S Corporation?
If you are thinking of starting a small business, it pays to take a look at the big picture. A small business will always grow into a larger business or company in the future and that is when most entrepreneurs realize that their tax rate has also become higher. The bigger your company – the higher the tax rate!
This is not all, you may even come face to face with tax season complexities, but the good news is that there is a bright side of it all. You can consider opting for an S Corporation!
S corps are business entities that have elected to pass their corporate income, loss, deduction, and credits through to the business shareholders for the purpose of federal taxation. As a result, the shareholders of an S Corporation will have to report their income or loss on the individual income tax returns.
Taxation difference between S Corporation and C Corporation
Is the taxation different for S corporation? Will it benefit you? These are some of the questions that you are probably encountering right now. So, let’s try and understand how this works.
One of the important aspects of s corporation vs c corporation scenario is that both type of corporations are taxed twice, which is at the state or local level as well as federal level. Hence, we have created a table to make it easier for you to understand the basic differences of state and federal taxes for both type of corporation.
State Taxation
- C Corporation – Different states in the USA have different tax requirements. For instance, some states require C corporations to pay annual tax also known as franchise tax in some states like Texas and Delaware. In some states, the C corp., is required to pay just the minimum tax each year for the life of that corporation.
- S Corporation – If you consider tax treatment of s corporation vs c corporation then there are 4 different state based approaches and they are:
- Those states that recognize the federal S corporation election unconditionally will adopt the flow-through taxation nature of S corporations. Thus such states will impose no entity-level tax on an S corp like Arkansas and New Jersey.
- There are states where the S corporation recognition remains on certain shareholder elections like Georgia.
- There are states that do not recognize the S corporation election and hence such a corporation is taxed the same way as general corporations like in Tennessee, New York City, and the District of Columbia.
- There are states that recognize a federal S corporation on a modified or limited basis like Alabama imposes a business privilege tax.
Federal Taxation
- C Corporation – In an s corporation vs c corporation scenario, one of the disadvantages of a c corp is that there are times when certain shareholders undergo double taxation. This is because a C corporation has to pay tax first at the corporate level and then individual shareholders will be required to pay taxes on the dividends paid by the same corporation. Every C Corporation has to file IRS Form 1120 to file their taxes.
- S Corporation – An S corporation is similar to that of a partnership, which means it is a pass-through entity. As a result, federal income tax is not levied at the corporate level. Instead, the shareholders of S corporations have to report the ‘flow-through’ of any income and loss on their personal tax returns and the tax is assessed at their individual income tax rate. As a result, an S Corp is taxed at a shareholder level. An S Corporation requires IRS Form 1120S for filing of taxes.
Enjoy Tax Benefits of an S Corporation – Grow your Business!
Benefits of forming an S Corporation
If you are planning to form or elect an S Corp., then what are the possible benefits? There are several S corporation advantages that will definitely be good for the business structure and overall growth of the entity.
Let’s look at some of the advantages of an S corporation vs a C corporation or LLC or any other form of business entity:
- Tax advantages: One of the most talked about S corporation advantages is the tax advantage.
- S Corporations are mostly exempted from any federal income tax except in the case of specific passive income and capital gains. One of the salient aspects of forming an S Corp., is the “Pass-through Taxation”. A pass-through entity means that any business income and losses, tax deductions, and credits, will be passed through to the owners or shareholders instead of being taxed at the corporate level. This protects the corporation from “double taxation,” which is fairly common in the case of C Corporations.
- Limited Liability or Asset Protection: This is one of the many S corporation advantages and it means that regardless of the tax status, owners and shareholders of the corporation can enjoy limited liability protection. The personal assets of the shareholders or owners will be shielded from any claims or litigation procedure initiated by creditors.
- Opt for Salary and Dividend Payments: One of the salient S corporation advantages is that an owner of the business entity can opt to receive salary as well as dividend payments from the corporation. This will lead to a lower tax bill as dividends will not be subjected to self-employment tax.
- Unlimited Life Span: If you are planning to set up an S corporation today then you can be rest assured that it has an almost unlimited life span. The business will continue to exist even if you leave the company in the near future