What Is an S-Corporation?

What Is an S-Corporation?

What Is an S-Corporation?

Dan had a great idea for a business. To get his idea off the ground, he started working on a business plan. One of the first – and most important – decisions Dan had to make was to choose a business structure. He could operate as a corporation, limited liability company, partnership, general partnership, limited partnership, or sole proprietorship. However, there was another choice – S-Corporation. Dan had heard of S-corporations but had no idea what they were and how they differed from other corporations. He wondered if this was the best business structure for his company.

S-Corporation Eligibility

First, this is not a separate business entity. It’s a type of corporation that elects to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code.

For a corporation to qualify as an S-Corporation, it must:

  • Be a domestic corporation,
  • Have no more than 100 eligible shareholders, and
  • Offer only one class of stock.

Certain types of corporations might be ineligible, including some financial institutions and insurance companies.

As you might expect, it’s important to look at the good, the bad, and the ugly when choosing to operate as an S-corporation.

Advantages and Disadvantages

Some good reasons to file an S-Corporation election include:

  • Protection from liability – Individual shareholders have some protection from actions taken by the corporation.
  • Pass-through taxation – This means that income is passed directly to the shareholders, which avoids the double taxation typically faced by corporations.

However, there are some disadvantages, like:

  • Limited Size – You might want to expand beyond 100 shareholders.
  • Types of Shareholders – Your shareholders must be individuals, specific trusts and estates, or certain tax-exempt organizations.

In some instances, shareholders ‘receive’ dividends that are actually reinvested back into the company. They may be required to pay income tax on the dividends, even though they did not actually receive the money.

Setting Up an S-Corporation

To form a corporation in Florida, you file paperwork with the Florida Division of Corporations. However, becoming an S-corporation involves the Internal Revenue Service (IRS).

To elect S-Corporation status, corporations submit Form 2553 Election by a Small Business Corporation form to the IRS. All the shareholders must sign the form.

Learn More About Your Potential S-Corporation.

An S-corporation gives you the advantages of a corporation with the tax burden of a partnership. Before forming any company, talk to an experienced business lawyer about the legal consequences of your decisions.

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.

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