Starting A Corporation

 

S Corporations: Election and Benefits Explained

s corporation

 

If you're considering changing your company to an S Corporation, this article will help you understand some of the benefits your company might enjoy as a result, plus it will also help you to understand the S Corporation election process as well should you decide that the benefits are worth pursuing.  

Lets start with the benefits of being an S Corporation:

The "S" basically identifies the tax status of your company, and it is the tax advantages that being an S Corporation offers that are the primary reason for considering such a status.

In simple terms, once you have elected for your incorporated company to be S designated, the company's shareholders are allowed to claim profits and losses in their own personal tax return and thus avoiding the double taxation suffered by C Corporation shareholders.  Put another way, the taxes due from the S Corporation are passed on to the shareholders in the direct proportion to the value of their shareholdings.  This means that instead of the S Corporation paying any taxes on its profits, they are paid via the individual tax returns of its shareholders.

To be eligible for these pass through tax benefits, the corporation is restricted to having no more than 75 shareholders.

Should you decide to take advantage of these tax benefits, you should note that your company will still retain its limited liability protection to shareholders as with other forms of corporations, which should be remembered, is the big advantage compared to continuing as a sole trader. 

S Corporations attract advantageous tax treatment over non incorporated businesses by the fact that they are allowed to deduct a number of expenses from their taxes whereas self employed sole traders are much more limited in what they are allowed to claim. 

In order for your company to become an S corporation, you must file an election with the IRS.  In this instance you deal with solely with the IRS as opposed to other state departments such as the secretary of state, as the election really is solely a taxation issue.    

 

The S Corporation Election Process  

To start the election process you need to complete "IRS Form '2553' - Election by a Small Business Corporation" which requires the following information:

  • the name of the corporation in full and it's address
  • the date of incorporation
  • the tax year to be covered by the election

It also requires the following information for each of the company's shareholders:

  • the full name, address and social security number
  • the signiture of each shareholder

The annual deadline for completing the election and filing it with the IRS is before the 15th day of the third month of the tax year for which you are electing s corporation status.  If your company has a lot of shareholders this deadline can become an issue through logistics of collecting the signatures.

The most practical time to seek election therefore is at the same time as you actually incorporate your business just for the sake of simplicity.

Above we have covered the basic benefits of electing to become an s corporation, but as with all the information on this site, you should always consult with a legal or financial professional before taking action or making decisions on your business.