Form a S-Corporation

Why choose an S-Corporation?

The stockholders of a corporation enjoy the benefit of limited liability. Generally, this means that their personal assets are protected against the claims of creditors of the corporation. There are instances in which the stockholders of the corporation will be held personally responsible for the debts of the corporation. This is true of certain types of taxes for example, sales tax and payroll taxes.

Corporations are audited less frequently by the IRS than Sole Proprietorships.

What is an S-Corporation?

Both the S-Corporation and C-Corporation are a business structure in which there are individuals that contribute money and or property in exchange for an ownership interest in the corporation. These individuals are referred to as "Stockholders" of the corporation. The stockholders percentage of ownership interest is represented by the number of shares of stock held by each stockholder.

The real difference between an S-Corporation and a C-Corporation is in the classification for federal tax purposes. An S-Corporation is simply a C-Corp in which the shareholders have elected to be taxed as an S-Corp.

Corporation Taxes

The issue of whether or not to conduct business as an S-Corporation vs. C-Corporation has come up time and time again. The C-Corporation is a separate entity for tax purposes. This means that a C-Corporation pays taxes (at the corporate rates) as a business entity separate and distinct from the individual stockholders. This is what is referred to as being taxed at the corporation level vs. being taxed at the individual stockholder level. In addition, the distribution of income of a C-Corporation can be subjected to double taxation. This can be avoided by electing S-Corporation Status.

The Internal Revenue Service as well as some states and cities, allow the stockholders of a C-Corporation to elect to be taxed as an S-Corporation. The profit or loss of the S-Corporation flows through to the individual stockholders in proportion with their ownership interest in the S-Corporation. This is what is referred to as a "flow through entity". Therefore the S-Corp generally does not pay its own taxes. The stockholders pay the tax on their proportionate share of the corporate profits at the individual rates as opposed to the corporate rates.

So why bother with an S-Corp? Because you can avoid the double taxation. In addition, not only do the profits flow through to the stockholders, but the losses can also. With limitations, the losses can flow through to the stockholders personal income tax return and be used against other income, i.e. Wages.

How do I form an S-Corporation?

First you have to incorporate. All corporations by default are C-Corporations when first incorporated. Corporation formation requires filing the appropriate "Articles of Incorporation" generally with the Secretary of State (SOS).

The stockholders must complete and submit the appropriate Federal and State forms to make the affirmative election to convert from C-Corporation to S-Corporation status. There is a 2 1/2 month window of opportunity to make the election. Otherwise you would be taxed as a C-Corp for that tax year. The window does re-open at the start of the new tax year. Generally an S-Corp. must maintain a calendar year for tax purposes.

The Articles of Incorporation requirements vary from state to state.

The corporate name must be distinguishable from the name of any other LLC, corporation, limited partnership, or company incorporated, organized or authorized to transact business, in that State.

The specific state fees must be paid to the state before the corporate filing will be accepted by that state.

Depending upon the state, and the type of corporation, there are unique procedures along with accompanying cover letters, and specific documentation to be submitted.