Introduction to S corporations

Setting up a corporation has many benefits to an entrepreneur wishing to embark in a business. By incorporating, the business owner and shareholders reduce their liability by shifting the liability from the owners to the entity. One consideration that must be addressed in all business decisions is what the impact taxes will have on each decision. One common draw back of setting up a corporation is the “double taxation” consequence which relates to the corporate profits being taxed on the corporate level and then once again on the shareholders portion. The IRS has permitted some business to elect an option to charter their corporations as “S corporations” meaning that if certain criteria’s are met then the profits would only be taxed once under the shareholders portion. This election can make a substantial difference in a company’s profitability.
In order for one to be able to legally elect this option there are a several criteria’s that must be met: (1) Must be an eligible entity, (2) No more than 100 shareholders, (3) Shareholders must be US citizens or residents and must be natural person, (4) One class of stock, (5) Profits and losses are to be distributed proportionately to shareholders. If all five of these criteria’s mentioned above are satisfied then an election can be made by filing form 2553 within 75 days of the first tax year. This is election is only for federal tax purposes and some states do offer “S corporations” as well.
Having defined what a “S corporation” is and its potential benefits it would be my advice to have your business set up for tax purposes as an “S corporation.” You would benefit in the reduced taxes that your company would be paying, while still enjoying the reduced liability benefits of incorporating.