Recent Answers to S Corp Law Questions

Daniel D.

Answered Sep 20, 2024

Advantages of Forming an S-Corporation Tax Benefits: Pass-Through Taxation: An S-Corp does not pay federal income taxes at the corporate level. Instead, the income, deductions, and credits "pass through" to the shareholders, who report them on their personal tax returns. This avoids the "double taxation" that occurs with a C-Corporation. Self-Employment Tax Savings: As an S-Corp owner, you can divide income between salary and distributions. Only the salary portion is subject to payroll taxes (Medicare and Social Security), while distributions are not. This can reduce self-employment taxes. Tax Deductibility: Expenses such as health insurance premiums for shareholders may be deductible, along with business expenses. Liability Protection: Like other corporations, an S-Corp provides personal liability protection. Your personal assets (e.g., house, personal bank accounts) are generally shielded from business debts and legal actions against the company, provided you follow corporate formalities. Credibility: Forming an S-Corp can give your business greater credibility with customers, vendors, and lenders. It shows you are a legitimate business entity, which may help when seeking financing or contracts. Potential State Tax Benefits: Some states provide additional tax benefits for S-Corps, although this varies by state. Disadvantages of Forming an S-Corporation Ownership Restrictions: An S-Corp can have no more than 100 shareholders, and all shareholders must be U.S. citizens or residents. This can limit the growth potential if you plan to bring in additional investors. S-Corps can only issue one class of stock, which may restrict your ability to attract certain types of investors or structure equity creatively. Administrative and Legal Requirements: Corporate Formalities: S-Corps must adhere to certain formalities, such as holding annual shareholder meetings, maintaining a board of directors, keeping detailed records, and filing required documents with the state. Failure to follow these rules can result in losing your liability protection. Payroll Requirements: If you work in the business, you must pay yourself a reasonable salary, which adds payroll administrative costs. You’ll also have to withhold and pay employment taxes on that salary. Tax Complexity: While S-Corps offer tax advantages, they also bring complexity, especially when it comes to classifying distributions versus salary. Misclassification can trigger IRS audits or penalties. Some states do not recognize S-Corporation status, meaning your business may still be subject to state-level corporate taxes. Limited Flexibility in Income Allocation: S-Corps require that profits and losses be allocated strictly based on ownership percentage. This limits flexibility if you want to allocate profits disproportionately among shareholders.

Michael R.

Answered Sep 19, 2023

There is no such thing as a digital S corporation. An S corporation is simply a corporation which makes an election to be taxed as a partnership.

Nicholas M.

Answered Aug 11, 2023

An S-Corp has some limitations here (such as no more than 100 share holders and only one class of stock). Depending on the control that you seek to retain in your business, you may want to transition to a full C-Corp, restructure preferred (voting) shares from equity shares, and manage your business governance (Board of Directors, Officers, Resolutions, etc.) in a way big investors will find compelling.

Chris J.

Answered Jul 21, 2023

Hi: Generally speaking, you have several options (many of which you've identified). 1. You can revoke S-Corp status (if you have a corporation and want C-Corp status). However, revocation won't be effective until the 2024 tax year. With that said, sometimes people inadvertently revoke S-Corp status by taking certain actions (which we can discuss). 2. You can create a new entity and structure it in the way you want (corporation, LLC, partnership, etc.). Then, you can wind down the S-Corp. 3. You can merge your existing S-Corp into an entity and have that entity survive and your S-Corp "merge out" and disappear. The approach that makes the most sense depends upon your business, the assets held by your S-Corp, and your objectives. Best regards, Chris Jackson

Kimbrelly K.

Answered Jul 4, 2023

If you have already properly formed your S copy - 1120 S filing with a recognition from the IRS, your best next consult is with a CPA experienced with S corps and your personal financial situation. An attorney can assist with other capital suggestions, but the entity has been formed. So a CPA and/or an attorney with an LLM in tax are your next best partners.

Thomas L.

Answered Jun 30, 2023

Employees of Sub-S corporations are employees under the IRC. So the question of employee benefits is not specific to Sub-S corporations. You should consider a PEO.