The S corporation can be somewhat of a mystery to many people. Florida business owners can choose from four basic types of business entities: sole proprietorship, partnership, limited liability company, and corporation.
But is the S corporation just a variation of a ‘corporation,’ or is it a completely different type of entity?
The answer may surprise you.
What Is a Corporation?
Corporations are one of the more formal types of business entity. Forming one is usually more expensive and time-consuming. Also, corporations are actually a separate legal entity that has some of the same rights and obligations as individuals. In fact, some people call a corporation a “legal person.”
People sometimes choose to form corporations because owners enjoy limited liability. This provides a level of property for the owners’ personal assets because owners or shareholders typically are not responsible for corporate debts.
Another consideration involves how profits are taxed. The corporation’s profits are taxed, but owners and shareholders pay taxes on their profits also. Some people refer to this as double taxation.
How is an S corporation different?
Like C corporations, S corporations are considered a separate legal entity. But an S corp must meet specific Internal Revenue Code (IRC) requirements contained in Subchapter S of the IRC.
Specific requirements include:
“being incorporated domestically (within the U.S.)
having only one class of stock
not having more than 100 shareholders
have shareholders who meet specific eligibility requirements.”
Unlike a C corporation, the S corporation avoids double taxation and becomes a pass-through entity. This means that the business income passes directly to shareholders, as well as the company’s losses, deductions, and credits. The S corp does not pay federal corporate tax in most aspects.
Otherwise, the S corporation generally operates like a C corp. Formation, management, and internal practices like having a board of directors and conducting shareholders’ meetings remain the same.
Why choose an S corporation?
There are several distinct advantages and disadvantages to forming a corporation under Subchapter S.
The primary reason for most business owners is to operate under a more favorable tax status. That’s because an S corporation does not pay taxes at the entity level. Reducing the tax burden is especially helpful for young businesses.
Business owners also might lower their tax burden by characterizing their business income as salary or dividends.
It’s also possible to “transfer interests or adjust property basis, without facing adverse tax consequences or having to comply with complex accounting rules.”
Despite its advantages, an S corporation still faces the same formation costs as a C corporation. The only real difference between the two is that the S corporation elected S corporation tax status and the C corporation did not. Management and corporate compliance also may be more complicated than those faced by other types of business entities, like sole proprietorships, partnerships, and limited liability companies.
Does Your Corporation Need to Be an S Corporation?
If so, the company needs to file an Election by a Small Business Corporation (Form 2553) with the IRS. As long as the corporation meets all requirements, the IRS generally approves the election.
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with business and litigation matters. As always, Our Goal Is to Help You Succeed™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.